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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT
For the transition period from to
COMMISSION FILE NUMBER: 0-27527
PLUG POWER INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3672377
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(State or other jurisdiction (I.R.S. Identification Number)
of incorporation or organization)
968 ALBANY-SHAKER ROAD, LATHAM, NEW YORK 12110
(Address of principal executive offices, including zip code)
(518) 782-7700
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, par value $.01 per share.
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Sections 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or an
amendment to this Form 10-K. [X]
As of March 22, 2000, 43,096,393 shares of the Registrant's Common Stock
were issued and outstanding. The aggregate market value of the voting stock of
the Registrant held by non-affiliates of the Registrant, based upon the
closing sale price of $109.25 on the Nasdaq National Market on March 22, 2000,
was $923,914,483.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement relating to the Registrant's
Annual Meeting of stockholders to be held on May 24, 2000 are incorporated by
reference into Part III of this report to the extent described therein.
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PART I
Item 1. Business
Overview
We are a designer and developer of on-site electricity generation systems
utilizing proton exchange membrane (PEM) fuel cells for residential
applications. Our residential fuel cell system will be an appliance, initially
about the size of a refrigerator, that will produce electricity through a
clean, efficient process without combustion. Our system will receive fuel from
a home's existing natural gas line or propane tank, convert the fuel into a
hydrogen-rich stream, and then combine it with oxygen from the air in a
chemical reaction that produces electric power. Our initial residential
systems will be designed to supply 7 kW of baseload power, 10 kW of peak
power, and 15 kW of surge load capacity, which will provide the full
electricity needs of a home, although the home can remain connected to the
electric grid for back-up purposes. We plan to bring our first residential
fuel cell systems to market in 2001, and, by 2003, we expect to offer
different model sizes designed to meet the specific power needs of various
market segments.
We were formed in June 1997 as a joint venture between Mechanical
Technology Incorporated and Edison Development Corporation to further the
development of fuel cells for electric power generation in residential and
other applications. At formation, Mechanical Technology contributed its fuel
cell business, including 22 people, intellectual property, equipment,
facilities and government contracts and grants related to automotive fuel cell
research, while Edison Development contributed cash, expertise in distributed
generation and the marketplace presence to distribute and sell fuel cell
systems for residential applications.
In November 1999, we completed an initial public offering of 6,782,900
shares of common stock, including 782,900 shares pursuant to the underwriters'
exercise of their over-allotment option, (the "Offering") at an offering price
of $15.00 per share.
Fuel Cells and Fuel Cell Systems
A fuel cell is a device that combines hydrogen, derived from a fuel such as
natural gas, propane, methanol or gasoline, and oxygen from the air to produce
electric power without combustion. Plug Power fuel cells consist principally
of two electrodes, the anode and the cathode, separated by a polymer
electrolyte membrane. Each of the electrodes is coated on one side with a
platinum-based catalyst. Hydrogen fuel is fed into the anode and air enters
through the cathode. Induced by the platinum catalyst, the hydrogen molecule
splits into two protons and two electrons. The electrons are conducted around
the membrane creating an electric current and the protons from the hydrogen
molecule are transported through the polymer electrolyte membrane and combine
at the cathode with the electrons and oxygen from the air to form water and
produce heat.
To obtain the desired level of electric power, individual fuel cells are
combined into a fuel cell stack. Increasing the number of fuel cells in a
stack increases the voltage, while increasing the surface area of each fuel
cell increases the current. Our initial residential systems will provide 7kW
of baseload power, 10kW of peak power and 15kW of surge load capacity.
The components and subsystems of our fuel cell systems include a fuel
reformer or processor, a fuel cell stack, a power conditioner or inverter, a
fuel supply subsystem, an air supply subsystem, a water management loop, a
thermal loop, a thermal management system, a microprocessor-based control unit
and a battery.
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Product Development and Commercialization
To date, we have achieved the following major milestones along our product
development and commercialization schedule:
Date Milestone
---- ---------
June 1998...... Powered a three-bedroom home with a hydrogen-fueled
residential fuel cell system
November 1998.. Demonstrated a methanol-fueled residential fuel cell system
December 1998.. Selected to design and manufacture 80 test and evaluation
residential fuel cell systems for the State of New York for
installation at various test sites over the next two years
December 1998.. Demonstrated a natural gas-fueled residential fuel cell system
February 1999.. Entered into an agreement with GE MicroGen, Inc. (formerly, GE
On-Site Power) to distribute and service our residential fuel
cell systems
June 1999...... Hired our 250th employee, up from 22 employees at inception
August 1999.... Powered a three-bedroom home with a residential fuel cell
system connected to its existing natural gas pipeline
December 1999.. Completed 52nd fuel cell system. Of these systems, 37 have
been built to run on natural gas and 15 to operate on
simulated fuel.
February 2000.. Acquired intellectual property and assets related to fuel
processor development from Gastec.
February 2000.. Completed construction of a state-of-the-art, 50,000 square
foot manufacturing facility in Latham, New York
March 2000..... Entered into a joint development agreement with Joh. Vaillant
GmbH u. Co. to develop a combined furnace, hot water heater
and fuel cell system.
March 2000..... Acquired an ownership interest in Advanced Energy Systems
power electronics technology.
March 2000..... Filed our 63rd patent application relating to fuel cell
technology, system designs and manufacturing processes
We are implementing our product development plan in four phases. Our cash
requirements during this time period will depend on numerous factors,
including the progress of our product commercialization activities, and the
pace at which we hire and train our production staff, develop and expand our
manufacturing capacity and expand our research and development activities. We
believe that our current cash balances will provide us with sufficient capital
to fund operations through the end of the first half of 2001.
. Phase 1--Research, Development and Engineering. Our 50,000 square foot
research and development facility contains over 90 test stations where
we conduct design optimization and verification testing, rapid-aging
testing, failure mode and effects analysis, multiple technology
evaluations, and endurance testing in our effort to accelerate the
development and commercialization of our fuel cell systems. In 1999, we
focused on developing and testing residential fuel cell systems, both in
the laboratory and at selected test sites, to obtain data that can help
us advance the design and construction of low-cost systems. We are
selecting suppliers to provide components and subsystems for our pre-
commercial and commercial systems on a long-term basis. During 1999, we
produced 52 test and evaluation systems built to run on natural gas and
simulated natural gas reformate to test different system design
elements. These systems are evaluated in our laboratories and at
selected test sites. Based on the data we obtain from these field
trials, we will determine the final design of our pre-commercial
product.
. Phase 2--Pre-Commercial Testing. In year 2000, we expect to begin small-
scale production of our pre-commercial systems. GE Fuel Cell Systems,
LLC, a joint venture owned 75% by GE MicroGen, Inc. (formerly GE On-Site
Power) and 25% by Plug Power, has committed to purchase 485 of these
systems and is expected to place them with its local market distribution
partners. All of these partners
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will be expected to participate in field trials and evaluations designed
to test system design and performance, as well as customer preferences.
We intend to use this data to optimize product design and speed
commercialization and mass market acceptance. During this period we also
expect to complete development of a propane-fueled system.
. Phase 3--Manufacturing and Commercialization. In 2001, we intend to
begin producing our first commercial fuel cell systems for residential
use. These systems will include any necessary modifications identified
during pre-commercial testing. During this period, we also intend to
expand our manufacturing capabilities, beginning large scale commercial
production while continuing to refine our manufacturing processes.
. Phase 4--Next Generation Models. In 2003, when we expect to have
achieved mass market production of our basic systems, we intend to
produce new models offering enhanced features, including models with co-
generation capabilities. In March 2000, we entered into a joint
development agreement with Joh. Vaillant GmbH u. Co. and GE MicroGen to
develop a combined furnace, hot water heater and fuel cell system that
will provide both heat and electricity for the home. Vaillant is a
leading European heating technology company and offers its customers a
complete range of products for central heating and hot water.
Manufacturing
Our goal is to mass manufacture reliable and safe residential fuel cell
systems at affordable cost for mass market consumption. We are focusing our
efforts on overall system design, component and subsystem integration,
assembly, and quality control processes. We have also begun to establish a
manufacturing infrastructure by hiring assembly and related support staff,
installing a new management information system, and developing our
manufacturing processes, including defining work centers and related
responsibilities. In February 2000, we completed construction of our
50,000 square foot manufacturing facility, adjacent to our development
laboratories, that will allow us to begin manufacturing of our pre-commercial
and initial commercial systems.
We plan to utilize third-party suppliers who, with our assistance, can
design, develop and/or manufacture subsystems and components that achieve our
cost and reliability targets. We plan to perform significant quality testing
before we integrate any third-party subsystems and components into our final
assembled fuel cell system. As we move toward the commercialization stage we
will begin to shift our focus from research and development to high volume
production.
Based on our commercialization plan, we anticipate that our existing
facilities and our new manufacturing plant will provide sufficient capacity
through 2001, and that we will need to develop or build additional capacity in
order to achieve mass market production by 2003.
Distribution and Marketing
In February 1999, we entered into an agreement with GE MicroGen, Inc.
(formerly GE On-Site Power) to create GE Fuel Cell Systems, LLC, a joint
venture owned 75% by GE MicroGen and 25% by Plug Power, which is dedicated to
marketing, selling, installing and servicing Plug Power fuel cell systems.
Plug Power will serve as GE Fuel Cell Systems' exclusive worldwide supplier of
fuel cell systems designed for residential and commercial applications under
35kW. We believe that most residential applications and many small commercial
applications require less than 35kW. GE Fuel Cell Systems will have the
exclusive worldwide rights to market, distribute, install and service our
systems (other than in the states of Illinois, Indiana, Michigan and Ohio, in
which Edison Development will be our exclusive distributor). Under this
arrangement, we will sell our systems directly to GE Fuel Cell Systems, which,
in turn, will identify qualified resellers who can distribute and service
these systems. Plug Power systems sold through GE Fuel Cell Systems will be
co-branded with both the General Electric and Plug Power names and trademarks,
and may also carry the brand of the local reseller.
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Potential GE Fuel Cell Systems' resellers include natural gas distributors,
propane distributors, rural electric cooperatives, electric utilities and new
market entrants such as gas and power marketers, unregulated affiliates of
utilities, appliance distributors and energy service companies.
Potential reseller agreements will be aimed at requiring distributors to
purchase fuel cell systems only from GE Fuel Cell Systems and to commit to
minimum purchase requirements. To date, GE Fuel Cell Systems has entered into
memoranda of understanding with potential resellers, including NJR Energy
Holdings Corporation, an affiliate of New Jersey Natural Gas Company, and
Flint Energies, a Georgia-based rural electric cooperative. We expect GE Fuel
Cell Systems to enter into similar arrangements with selected resellers around
the world.
Together with GE Fuel Cell Systems, we have conducted a preliminary
evaluation of target markets and potential customers, taking into account such
factors as average household electricity usage, ability to pay, power
availability and quality, availability of fuel, the prices of electricity and
natural gas, penetration of competing distributed generation technologies, new
capacity requirements and the cost of new capacity additions. Based on this
evaluation, we intend to target the following market segments during 2001 and
2002 for our first commercial fuel cell systems: homes served by rural
electric cooperatives, homes in urban and suburban load pockets, high-
consumption households, owners and builders of remote homes and dissatisfied
utility customers.
After introducing our first commercial systems in 2001 to our targeted
early markets, we believe that we will gain the experience and capabilities
necessary to lower the estimated price of our systems to consumers to
approximately $3,000 to $5,000, subject to market demand, expanding our
manufacturing capacity and, through GE Fuel Cell Systems, extending our sales
efforts. Our targeted mass market segments will include: homes utilizing
natural gas, new homes and homes in countries with inadequate or no existing
electric power infrastructure.
Installation, Servicing and Maintenance
We plan to design our fuel cell systems to last approximately 15 to 20
years, with major component maintenance and replacements scheduled to occur
every four to seven years. Items such as air filters will require annual
replacement. GE Fuel Cell Systems has committed to provide complete product
support for Plug Power systems through its own service structure, reseller
service network, and contracts with third party service providers.
GE Fuel Cell Systems' service program is expected to be closely coordinated
with the introduction of Plug Power's fuel cell systems, so that a sufficient
level of installation, maintenance, and customer support service will be
available in all areas where our systems are sold. We also expect that GE Fuel
Cell Systems will provide the warranty service for our products according to
terms to be mutually agreed upon by Plug Power and GE Fuel Cell Systems. We
expect that GE Fuel Cell Systems' service plan will be completed and the
requisite service contracts in place prior to the release of our commercial
units.
Proprietary Rights
Fuel cell technology has existed since the 19th century, and PEM fuel cells
were first developed in the 1950s. Consequently, we believe that neither we
nor our competitors can achieve a significant proprietary position on the
basic technologies used in fuel cell systems. However, we believe the design
and integration of the system and system components, as well as some of the
low-cost manufacturing processes that we have developed, can be protected.
To date, we have 10 issued patents and 53 patents pending. These patents
cover, among other things, fuel cell components that reduce manufacturing part
count, fuel cell system designs that lend themselves to mass manufacturing,
improvements to fuel cell system efficiency, reliability, and longer system
life, and control strategies, such as added safety protections and operation
under extreme conditions. Each of our employees has
5
agreed that all inventions made or conceived while an employee of Plug Power
which are related to or result from work or research that Plug Power performs
will remain the sole and exclusive property of Plug Power, whether patented or
not.
Competition
There are a number of companies located in the United States, Canada and
abroad that are developing PEM fuel cell technology. Ballard Power Systems
Inc., a publicly traded company located in Vancouver, British Columbia, has
been developing PEM fuel cell technology since the mid-1980s and has attracted
substantial funding from a number of partners, including DaimlerChrysler AG
and Ford Motor Company. A number of major automotive and manufacturing
companies also have in-house PEM fuel cell development efforts, including
International Fuel Cells Corporation, a subsidiary of United Technologies
Corporation. In addition, we believe approximately 10 companies have
established residential fuel cell system development programs.
We also compete with companies that are developing other types of fuel
cells. There are four types of fuel cells other than PEM fuel cells that are
generally considered to have viable commercial applications: phosphoric acid
fuel cells, molten carbonate fuel cells, solid oxide fuel cells and alkaline
fuel cells. Each of these fuel cells differs in the component materials, as
well as in its overall operating temperature.
Our systems will also compete with other distributed generation
technologies, including microturbines and reciprocating engines, available at
prices competitive with existing forms of power generation. Our systems will
also compete with solar and wind-powered systems.
Once we begin selling our systems, we intend to compete primarily on the
basis of cost, reliability, efficiency and environmental considerations.
Government Regulation
We do not believe that we will be subject to existing federal and state
regulatory commissions governing traditional electric utilities and other
regulated entities. We do believe that our product and its installation will
be subject to oversight and regulation at the local level in accordance with
state and local ordinances relating to building codes, safety, pipeline
connections and related matters. Such regulation may depend, in part, upon
whether a system is placed outside or inside a home. At this time, we do not
know which jurisdictions, if any, will impose regulations upon our product or
installation. We also do not know the extent to which any existing or new
regulations may impact our ability to distribute, install and service our
product. Once our product reaches the commercialization stage and we begin
distributing our systems to our target early markets, federal, state or local
government entities or competitors may seek to impose regulations.
Employees
As of December 31, 1999, we had a total staff of approximately 315,
including approximately 295 full-time employees, of which approximately 175
were engineers, scientists, and other degreed professionals. We consider our
relations with our employees to be good.
Risk Factors
This Annual Report on Form 10-K contains forward-looking statements. You
can identify these statements by forward-looking words such as "may," "will,"
"expect," "anticipate," "believe," "estimate" and "continue" or similar words.
You should read statements that contain these words carefully because they
discuss our future expectations, contain projections of our future results of
operations or of our financial condition or state other "forward-looking"
information. We believe that it is important to communicate our future
expectations to our investors. However, there may be events in the future that
we are not able to accurately
6
predict or control and that may cause our actual results to differ materially
from the expectations we describe in our forward-looking statements. Investors
are cautioned that all forward-looking statements involve risks and
uncertainties, and actual results may differ materially from those discussed
as a result of various factors, including the risks described below.
We have only been in business for a short time and your basis for evaluating
us is limited
We were formed in June 1997 to further the research and development of
residential fuel cell systems. We do not expect to have a commercially viable
product until at least 2001. Accordingly, there is only a limited basis upon
which you can evaluate our business and prospects. An investor in our common
stock should consider the challenges, expenses and difficulties that we will
face as a development stage company seeking to develop and manufacture a new
product.
We have incurred losses and anticipate continued losses through at least 2003
As of December 31, 1999, we had an accumulated deficit of $49.0 million. We
have not achieved profitability and expect to continue to incur net losses
until we can produce sufficient revenues to cover our costs. We expect the
cost to produce our pre-commercial systems to be higher than their sales price
under the terms of our distribution arrangements with GE Fuel Cell Systems and
Edison Development. Furthermore, even if we achieve our objective of bringing
our first commercial product to market in 2001, we anticipate that we will
continue to incur losses until we can cost-effectively produce and sell our
residential fuel cell systems to the mass market, which we do not expect to
occur until after 2002. Even if we do achieve profitability, we may be unable
to sustain or increase our profitability in the future.
We may never complete the research and development of a commercially viable
residential fuel cell system
We do not know when or whether we will successfully complete research and
development of a commercially viable residential fuel cell system. We have
produced and are currently demonstrating a number of test and evaluation
systems and are continuing our efforts to decrease the costs of our systems'
components and subsystems, improve their overall reliability and efficiency,
and ensure their safety. However, we must complete substantial additional
research and development on our systems before we will have a commercially
viable product. In addition, while we are conducting tests to predict the
overall life of our systems, we will not have run our systems over their
projected useful life prior to commercialization.
A mass market for residential fuel cell systems may never develop or may take
longer to develop than we anticipate
Fuel cell systems for residential use represent an emerging market, and we
do not know whether our targeted distributors and resellers will want to
purchase them or whether end-users will want to use them. If a mass market
fails to develop or develops more slowly than we anticipate, we may be unable
to recover the losses we will have incurred to develop our product and may be
unable to achieve profitability. The development of a mass market for our
systems may be impacted by many factors which are out of our control,
including: the cost competitiveness of fuel cell systems; the future costs of
natural gas, propane and other fuels used by our systems; consumer reluctance
to try a new product; consumer perceptions of our systems' safety; regulatory
requirements; and the emergence of newer, more competitive technologies and
products.
We have no experience manufacturing residential fuel cell systems on a
commercial basis
To date, we have focused primarily on research and development and have no
experience manufacturing fuel cell systems for the residential market on a
commercial basis. We recently completed construction of our 50,000 square foot
manufacturing facility and are continuing to develop our manufacturing
capability and processes. We do not know whether or when we will be able to
develop efficient, low-cost manufacturing
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capability and processes that will enable us to meet the quality, price,
engineering, design and production standards or production volumes required to
successfully mass market our residential fuel cell systems. Even if we are
successful in developing our manufacturing capability and processes, we do not
know whether we will do so in time to meet our product commercialization
schedule or to satisfy the requirements of our distributors or customers.
We are heavily dependent on our relationship with GE Fuel Cell Systems and
General Electric's commitment to develop the residential fuel cell market
Substantially all of our revenue for the foreseeable future will be derived
from sales of our products to GE Fuel Cell Systems. We have granted to GE Fuel
Cell Systems exclusive worldwide rights to market, distribute, install and
service Plug Power fuel cell systems designed for residential and commercial
applications under 35 kW (other than the states of Illinois, Indiana, Michigan
and Ohio, in which Edison Development has exclusive distribution rights).
Under our distribution agreement, we will sell our systems directly to GE Fuel
Cell Systems, which, in turn, will seek to sell them to selected resellers. We
are also obligated under an amendment to our agreement to purchase $12.0
million of technical support services from General Electric during the next
three years. Our distribution agreement expires in 2009, although General
Electric may terminate the agreement earlier if, among other reasons, we fail
to do any of the following: remain in material compliance with the development
schedule toward a January 1, 2001 product release; produce competitive
commercial fuel cell systems; meet commercial production and cost
requirements; produce systems that comply with regulatory requirements; or
obtain all necessary approvals and certifications for our systems.
Our ability to sell our systems to the mass market is heavily dependent
upon General Electric's worldwide sales and distribution network and service
capabilities. Even though we own a minority interest in GE Fuel Cell Systems,
we cannot control its operations or business decisions. Any change in our
relationship with General Electric, whether as a result of market, economic,
or competitive pressures, including any decision by General Electric to alter
its commitment to our fuel cell technology in favor of other fuel cell
technologies, to develop fuel cell systems targeted at different markets than
ours or to focus on different energy product solutions could harm our
potential earnings by depriving us of the benefits of General Electric's
worldwide sales and distribution network and service capabilities.
We may not meet our product development and commercialization milestones
We have established internal product development and commercialization
milestones and dates for achieving development goals related to technology and
design improvements. We use these internal milestones to assess our progress
toward developing a commercially viable residential fuel cell system. For
example, we established a milestone date of June 1998 for powering a home with
a hydrogen-fueled residential fuel cell system and established a milestone
date of October 1998 for demonstrating a methanol-fueled system and a natural
gas-fueled system. While we successfully powered a three-bedroom home in June
1998 using a hydrogen-fueled system, our demonstration of the methanol-fueled
system did not occur until November 1998 and our demonstration of the natural
gas-fueled system did not occur until December 1998, in each case due to our
increased focus during that period on growing our work force and expanding our
physical plant and scope of operations. Neither of these delays, nor any other
missed milestone, has had any material impact on our commercialization
schedule to date. While we have been aggressive in setting our internal
milestones and have been generally successful in meeting them, if we do
experience delays in meeting our development goals or if our systems exhibit
technical defects or are unable to meet cost or performance goals, including
power output, useful life and reliability, our commercialization schedule
could be delayed beyond 2001. In such event, potential purchasers of our
initial commercial systems may choose alternative technologies and any delays
could allow potential competitors to gain market advantages. We cannot
guarantee that we will successfully achieve our milestones in the future.
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We are dependent on third party suppliers for the development and supply of
key components for our products
While we have recently entered into relationships with suppliers of our key
components, we do not know when or whether we will secure relationships with
suppliers of all required components and subsystems for our fuel cell systems,
or whether such relationships will be on terms that will allow us to achieve
our objectives. Our business, prospects, results of operations, or financial
condition could be harmed if we fail to secure relationships with entities who
will supply the required components for our systems.
Once we establish relationships with third party suppliers, we will rely on
them to provide components for our fuel cell systems. A supplier's failure to
develop and supply components in a timely manner, or to supply components that
meet our quality, quantity or cost requirements, or our inability to obtain
substitute sources of these components on a timely basis or on terms acceptable
to us, could harm our ability to manufacture our fuel cell systems. In
addition, to the extent the processes that our suppliers use to manufacture
components are proprietary, we may be unable to obtain comparable components
from alternative suppliers.
We face intense competition and may be unable to compete successfully
The markets for electricity are intensely competitive. There are many
companies engaged in all areas of traditional and alternative electric power
generation in the United States, Canada and abroad, including, among others,
major electric, oil, chemical, natural gas, and specialized electronics firms,
as well as universities, research institutions and foreign government-sponsored
companies. These firms are engaged in forms of power generation such as solar
and wind power, reciprocating diesel engines and microturbines as well as grid-
supplied electricity. Many of these entities have substantially greater
financial, research and development, manufacturing and marketing resources than
we do.
There are a number of companies located in the United States, Canada, and
abroad that are developing PEM fuel cell technology. We also compete with
companies that are developing applications, residential and otherwise, using
other types of fuel cells. Some of our competitors are much larger than we are.
If these larger competitors decide to focus on the development of residential
fuel cell systems, they have the manufacturing, marketing, and sales
capabilities to complete research, development and commercialization of a
commercially viable residential fuel cell system more quickly and effectively
than we can.
Changes in government regulations and electric utility industry restructuring
may affect demand for our fuel cell systems
The market for electricity generation products is heavily influenced by
federal and state governmental regulations and policies concerning the electric
utility industry. The loosening of current regulatory standards could deter
further investment in the research and development of alternative energy
sources, including fuel cells, and could result in a significant reduction in
the potential market demand for our products. We cannot predict how the
deregulation and restructuring of the industry will affect the market for
residential fuel cell systems.
Our business may become subject to future government regulation which may
impact our ability to market our product
We do not believe that our product will be subject to existing federal and
state regulations governing traditional electric utilities and other regulated
entities. We do believe that our product and its installation will be subject
to oversight and regulation at the local level in accordance with state and
local ordinances relating to building codes, safety, pipeline connections and
related matters. Such regulation may depend, in part, upon whether a fuel cell
system is placed outside or inside a home. At this time, we do not know which
jurisdictions, if any, will impose regulations upon our product. We also do not
know the extent to which any existing or new regulations may impact our ability
to distribute, install and service our product. Once our product reaches the
9
commercialization stage and we begin distributing our systems to our target
early markets, federal, state or local government entities or competitors may
seek to impose regulations. Any new government regulation of our product,
whether at the federal, state or local level, including any regulations
relating to installation and servicing of our products, may increase our costs
and the price of our systems, and may have a negative impact on our revenue
and profitability, and therefore, harm our business, prospects, results of
operations, or financial condition.
Utility companies could place barriers on our entry into the marketplace
Utility companies commonly charge fees to industrial customers for
disconnecting from the grid, for using less electricity, or for having the
capacity to use power from the grid for back-up purposes. Though these fees
are not currently charged to residential users, it is possible that utility
companies could in the future charge similar fees to residential customers.
The imposition of such fees could increase the cost to residential customers
of using our systems and could make our systems less desirable, thereby
harming our revenue and profitability.
Alternatives to our technology could render our systems obsolete prior to
commercialization
Our system is one of a number of alternative energy products being
developed today as supplements to the electric grid that have potential
residential applications, including microturbines, solar power and wind power,
and other types of fuel cell technologies. Improvements are also being made to
the existing electric transmission system. Technological advances in
alternative energy products, improvements in the electric grid or other fuel
cell technologies may render our systems obsolete.
The hydrocarbon fuels on which our systems rely may not be readily available
or available on a cost-effective basis
Our systems' ability to produce electricity depends on the availability of
natural gas and propane. If these fuels are not readily available to the mass
market, or if their prices are such that electricity produced by our systems
costs more than electricity provided through the grid, our systems would be
less attractive to potential users.
Our residential fuel cell systems use flammable fuels which are inherently
dangerous substances
Our residential fuel cell systems will utilize natural gas or propane in a
catalytic reaction which produces less heat than a typical gas furnace. While
our fuel cell system does not use these fuels in a combustion process, natural
gas and propane are flammable fuels that could leak in a home and combust if
ignited by another source. These dangers are present in any home appliance
that uses natural gas or propane, such as a gas furnace, stove or dryer. Since
our fuel cell systems are a new product, any accidents involving our systems
or other fuel cell-based products could impede demand for our products.
We may be unable to raise additional capital to complete our product
development and commercialization plans
Our product development and commercialization schedule could be delayed if
we are unable to fund our research and development activities or the
development of our manufacturing capabilities. We believe it is likely we will
need to raise additional funds to achieve full commercialization of our
product. We do not know whether we will be able to secure additional funding,
or funding on terms acceptable to us, to pursue our commercialization plans
through the mass market stage.
We may have difficulty managing the expansion of our operations
We are undergoing rapid growth in the number of our employees, the size of
our physical plant and the scope of our operations. For example, we began with
22 employees in June 1997 and had 315 at the end of
10
1999. Such rapid expansion is likely to place a significant strain on our
senior management team and other resources. Our business, prospects, results
of operations or financial condition could be harmed if we encounter
difficulties in effectively managing the budgeting, forecasting and other
process control issues presented by such a rapid expansion.
We face risks associated with our plans to market, distribute and service our
products internationally
We intend to market, distribute, and service our residential fuel cell
systems internationally through GE Fuel Cell Systems. We have limited
experience developing, and no experience manufacturing, our products to comply
with the commercial and legal requirements of international markets. Our
success in those markets will depend, in part, on GE Fuel Systems' ability to
secure relationships with foreign resellers and our ability to manufacture
products that meet foreign regulatory and commercial requirements. In
addition, our planned international operations are subject to other inherent
risks, including potential difficulties in enforcing contractual obligations
and intellectual property rights in foreign countries and fluctuations in
currency exchange rates.
We may not be able to protect important intellectual property
PEM fuel cell technology was first developed in the 1950s and we do not
believe we can achieve a significant proprietary position on the basic
technologies used in fuel cell systems. However, our ability to compete
effectively against other fuel cell companies will depend, in part, on our
ability to protect our proprietary technology, systems designs and
manufacturing processes. We do not know whether any of our pending patent
applications will issue or, in the case of patents issued or to be issued,
that the claims allowed are or will be sufficiently broad to protect our
technology or processes. Even if all of our patent applications are issued and
are sufficiently broad, they may be challenged or invalidated. We could incur
substantial costs in prosecuting or defending patent infringement suits. While
we have attempted to safeguard and maintain our proprietary rights, we do not
know whether we have been or will be completely successful in doing so.
Further, our competitors may independently develop or patent technologies
or processes that are substantially equivalent or superior to ours. If we are
found to be infringing third party patents, we do not know whether we will be
able to obtain licenses to use such patents on acceptable terms, if at all.
Failure to obtain needed licenses could delay or prevent the development,
manufacture or sale of our fuel cell systems.
We rely, in part, on contractual provisions to protect our trade secrets
and proprietary knowledge. These agreements may be breached, and we may not
have adequate remedies for any breach. Our trade secrets may also be known
without breach of such agreements or may be independently developed by
competitors. Our inability to maintain the proprietary nature of our
technology and processes could allow our competitors to limit or eliminate any
competitive advantages we may have and prevent us from being the first company
to commercialize residential fuel cell systems, thereby harming our business
prospects.
Our government contracts could restrict our ability to effectively
commercialize our technology
Under some of our contracts, government agencies can require us to obtain
or produce components for our systems from sources located in the United
States rather than foreign countries. Our contracts with government agencies
are also subject to the risk of termination at the convenience of the
contracting agency, potential disclosure of our confidential information to
third parties, and the exercise of "march-in" rights by the government. March-
in rights refer to the right of the United States government or government
agency to exercise its non-exclusive, royalty-free, irrevocable worldwide
license to any technology developed under contracts funded by the government
if the contractor fails to continue to develop the technology. The
implementation of restrictions on our sourcing of components or the exercise
of march-in rights could harm our business, prospects, results of operations,
or financial condition.
11
Our future plans could be harmed if we are unable to attract or retain key
personnel
We have attracted a highly skilled management team and specialized
workforce, including scientists, engineers, researchers, and manufacturing and
marketing professionals. Based on our planned expansion, we will require a
significant increase in the number of our employees and outside contractors.
Our future success, therefore, will depend, in part, on attracting and
retaining additional qualified management and technical personnel. We do not
know whether we will be successful in hiring or retaining qualified personnel.
Our inability to hire qualified personnel on a timely basis, or the departure
of key employees, could harm our expansion and commercialization plans.
Item 2. Properties
Our principal executive offices are located in Latham, New York. At our 36
acre campus, we own a 56,000 square foot research and development center, a
32,000 square foot office building and a 50,000 square foot manufacturing
facility and believe that these facilities are sufficient to accommodate our
anticipated growth through 2001.
Item 3. Legal Proceedings
On January 25, 2000, DCT, Inc. filed a complaint against Plug Power, The
Detroit Edison Company and Edison Development Corporation, alleging that these
entities misappropriated from DCT business and technical trade secrets, ideas,
know-how and strategies relating to fuel cell systems and breached certain
contractual obligations owed to DCT. We believe the allegations made against
us are without merit and we intend to vigorously contest the litigation.
Discovery is currently underway. Due to the early stage of this litigation, we
cannot determine whether any loss will result from the ultimate outcome.
Item 4. Submission of Matters to a Vote of Security Holders
A) On October 28, 1999, Plug Power, LLC, as the sole stockholder of Plug
Power Inc., by unanimous written consent in lieu of a special meeting,
approved and adopted an amendment and restatement of our Certificate of
Incorporation.
B) On October 28, 1999, Plug Power, LLC, as the sole stockholder of Plug
Power Inc., by unanimous written consent in lieu of a special meeting,
approved and adopted the merger of Plug Power Inc. with its parent
corporation, Plug Power, LLC, with Plug Power Inc. surviving the merger
and otherwise upon the terms and conditions of an Agreement and Plan of
Merger.
12
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information. Our Common Stock is traded on the Nasdaq National
Market under the symbol "PLUG." As of December 31, 1999, there were 315
shareholders of record. The following table sets forth high and low last
reported sale prices for the Common Stock for each fiscal quarter since the
effective date of the Offering, October 28, 1999, through March 22, 2000.
Closing sales
prices
--------------
High Low
------- ------
1999
4th Quarter (from October 28, 1999).......................... $ 34.50 $15.00
2000
1st Quarter (through March 22, 2000)......................... $149.75 $25.75
Dividend Policy. We have never declared or paid cash dividends on the
Common Stock. Any future determination as to the payment of dividends will
depend upon capital requirements and limitations imposed by our credit
agreements, if any, and such other factors as our board of directors may
consider.
Recent Sales of Unregistered Securities. During the period covered by this
report on Form 10-K, we issued and sold unregistered securities as follows:
In January 1999, we sold 100,000 shares of Common Stock for an aggregate
purchase price of $500,000 to Edison Development Corporation.
In January 1999, we sold 100,000 shares of Common Stock for an aggregate
purchase price of $500,000 to Mechanical Technology Incorporated.
In January 1999, we granted to each of Mechanical Technology and Edison
Development warrants to purchase up to 3 million shares of Common Stock at
an exercise price of $7.50 per share. Each of Mechanical Technology and
Edison Development exercised their warrants in full for a purchase price of
$22.5 million each.
In February 1999, we sold 200,000 shares of Common Stock for an
aggregate purchase price of $1.0 million to Edison Development.
In February 1999, we sold 200,000 shares of Common Stock for an
aggregate purchase price of $1.0 million to Mechanical Technology.
In February 1999, we granted a warrant to Mr. Michael Cudahy, a director
of Plug Power, to purchase up to 400,000 shares of Common Stock at an
exercise price of $8.50 per share and sold to Mr. Cudahy 1,440,000 shares
of Common Stock for $9.6 million. In November 1999, Mr. Cudahy exercised
his warrant in full for a total purchase price of $3.4 million.
In February 1999, we sold 60,000 shares of Common Stock for an aggregate
purchase price of $400,000 to Kevin Lindsey.
In February 1999, we issued to GE MicroGen, a subsidiary of General
Electric Company, 2,250,000 shares of Common Stock in consideration of a
25% interest in GE Fuel Systems, LLC, a joint venture owned by GE MicroGen
and Plug Power.
In February 1999, we issued a warrant to GE MicroGen to purchase 3
million shares of Common Stock at a price of $12.50 per share. In November
1999, GE MicroGen exercised its warrant in full for a total purchase price
of $37.5 million.
13
In March 1999, we issued 2,250,000 shares of Common Stock to Mechanical
Technology upon the exercise of outstanding options in consideration of the
transfer of non-cash research credits.
In April 1999, we sold 299,850 shares of Common Stock for an aggregate
purchase price of $2.0 million to Antaeus Enterprises, Inc.
In April 1999, we sold 1,000,000 shares of Common Stock for an aggregate
purchase price of $6.67 million to Southern California Gas Company.
In April 1999, we granted warrants to purchase an aggregate of 350,000
shares of Common Stock to Southern California Gas Company at an exercise
price of $8.50 per share. In November 1999, Southern California Gas Company
exercised its warrants in full for a purchase price of $2.975 million.
In June 1999, we issued to Mechanical Technology 704,315 shares of
Common Stock in exchange for Mechanical Technology's 36-acre office
facility in Latham, New York.
In June 1999, we sold to Edison Development 704,315 shares of Common
Stock at $6.67 per share for $4.7 million.
In September 1999, we sold 266,667 shares of Common Stock for an
aggregate purchase price of $2,000,000 to Mechanical Technology.
In September 1999, we sold 266,667 shares of Common Stock for an
aggregate purchase price of $2,000,000 to Edison Development.
The sales and issuances of these securities were exempt from registration
under the Securities Act pursuant to Section 4(2) of the Securities Act on the
basis that the transactions did not involve a public offering.
From January 1, 1999 through December 31, 1999, we granted stock options to
purchase an aggregate of 2,047,039 shares of Common Stock with exercise prices
ranging from $5.00 to $15.00 per share, under our stock option plans. The
sales and issuances of these securities were exempt from registration under
the Securities Act pursuant to Rule 701 promulgated thereunder on the basis
that these options were offered and sold either pursuant to a written
compensatory benefit plan or pursuant to written contracts relating to
compensation, as provided by Rule 701.
Use of Proceeds. The effective date of the Securities Act registration
statement for which the use of proceeds information is being disclosed was
October 28, 1999, and the Commission file number assigned to the registration
statement is 333-86089. The use of proceeds of our initial public offering has
not changed from our quarterly report on Form 10-Q for the three month period
ended September 30, 1999.
14
Item 6. Selected Financial Data
The following table sets forth selected financial data and other operating
information of the Company. The selected income statement and balance sheet
data for 1999, 1998 and 1997 as set forth below are derived from the audited
financial statements of the Company. The information is only a summary and you
should read it in conjunction with the Company's audited financial statements
and related notes and other financial information included herein and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Year Ended For the period
------------------------- June 27, 1997 to
December 31, December 31, December 31,
1999 1998 1997
------------ ------------ ----------------
(in thousands, except
per share data)
Income Statement Data:
Contract revenue................... $ 11,000 $ 6,541 $ 1,194
Cost of contract revenue........... 15,498 8,864 1,226
-------- ------- -------
Loss on contracts.................. (4,498) (2,323) (32)
In-process research and
development....................... -- -- 4,043
Research and development expense... 20,506 4,633 1,301
General and administrative
expense........................... 9,927 2,753 630
Interest expense................... 190 -- --
-------- ------- -------
Operating loss................... (35,121) (9,709) (6,006)
Interest income.................... 3,124 93 103
-------- ------- -------
Loss before equity in losses of
affiliate....................... (31,997) (9,616) (5,903)
Equity in losses of affiliate...... (1,472) -- --
-------- ------- -------
Net loss......................... $(33,469) $(9,616) $(5,903)
======== ======= =======
Loss per share:
Basic and diluted................ $ (1.27) $ (0.71) $ (0.62)
======== ======= =======
Weighted average number of common
shares outstanding................ 26,283 13,617 9,500
======== ======= =======
Balance Sheet Data (at end of the
period):
Working capital.................... $169,212 $ 2,692 $ 2,667
Total assets....................... 216,126 8,093 4,846
Curent portion of long-term
obligations....................... 553 -- --
Long-term obligations.............. 6,517 --
Stockholders' equity............... 201,407 5,493 3,597
15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion should be read in conjunction with our
accompanying Financial Statements and Notes thereto included within this
Annual Report on Form 10-K. In addition to historical information, this Annual
Report on Form 10-K and the following discussion contain forward-looking
statements that reflect our plans, estimates, intentions, expectations and
beliefs. Our actual results could differ materially from those discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those set forth in Item I--
Business under the caption "Risk Factors."
Overview
Plug Power is a designer and developer of on-site, electricity generation
systems utilizing proton exchange membrane (PEM) fuel cells for residential
applications. GE Fuel Cell Systems, LLC, a joint venture 75% owned by General
Electric's GE Power Systems business and 25% owned by Plug Power, will market,
sell, service, and install our product.
Plug Power was formed in June 1997 as a joint venture to further the
development of fuel cells for electric power generation in residential and
other applications. We are a development stage company and expect to bring our
first commercial product to market in 2001.
Since inception, we have devoted substantially all of our resources toward
the development of the PEM fuel cell systems and have derived substantially
all of our revenue from government research and development contracts. Through
December 31, 1999, our stockholders in the aggregate had contributed $223.8
million in cash, including $93.0 million in net proceeds from our initial
public offering of common stock, which closed on November 3, 1999 and $25.5
million in other contributions, consisting of in-process research and
development, real estate, other in-kind contributions and a 25% interest in GE
Fuel Cell Systems.
Since our inception in June 1997, we have formed strategic alliances with
suppliers of key components, developed distributor and customer relationships,
and entered into development and demonstration programs with electric
utilities, government agencies and other energy providers. In 1999, we
produced 52 test and evaluation systems which were installed in laboratory and
field locations for field and market testing. Based on the system performance
and market data provided by these field trials, we will determine the final
design of our first pre-commercial product. During 2000 we expect to
manufacture approximately 500 pre-commercial residential fuel cell systems to
further our field testing activities and prepare for commercial production,
which is planned to begin in 2001. We do not expect significant product sales
until after we begin commercial production.
From inception through December 31, 1999, we incurred losses of $49.0
million. We expect to continue to incur losses as we expand our product
development and commercialization program and prepare for the commencement of
manufacturing operations. We expect that losses will fluctuate from quarter to
quarter and that such fluctuations may be substantial as a result of, among
other factors, the number of systems we produce and install for internal and
external testing, the related service requirements necessary to monitor those
systems and potential design changes required as a result of field testing.
There can be no assurance that we will manufacture or sell residential fuel
cell systems successfully or achieve or sustain product revenues or
profitability.
Recent Developments
Initial Public Offering:
In November 1999, the Company completed an initial public offering of
6,782,900 shares of common stock (the "Initial Public Offering") which
includes additional shares purchased pursuant to exercise of the underwriters
overallotment option. We received proceeds of $93.0 million, which was net of
$8.7 million of expenses and underwriting discounts relating to the issuance
and distribution of the securities. In connection with the Initial Public
Offering, we converted from a limited liability company to a C corporation.
16
Purchase of Assets:
On February 18, 2000, we acquired from Gastec, a leading developer of fuel
processor technology located in the Netherlands, intellectual property and
assets related to fuel processor development for systems ranging up to 100kW
in size. We paid $15 million in cash for the assets.
Equity Investments:
On March 15, 2000, we acquired 28% of the outstanding shares of common
stock of Advanced Energy Systems, Inc., a supplier of power electronic
inverters for fuel cell systems. We paid approximately $1.5 million in cash
and 7,000 shares of our common stock for the shares. In connection with the
transaction, we received an exclusive, worldwide, royalty-free license to use
all of Advanced Energy's intellectual property for power electronic inverters
for any fuel cell application.
Development Agreements:
On March 15, 2000, we entered into a joint development agreement with GE
MicroGen and Joh. Vaillant GmbH u. Co., a leading European heating technology
company, to develop a combined furnace, hot water heater and fuel cell system
that will provide both heat and electricity for the home.
Results of Operations
Comparison of the Year Ended December 31, 1999 and December 31, 1998.
Revenues. Our revenues during this period were derived primarily from cost
reimbursement government contracts relating to the development of PEM fuel
cell technology. These contracts provide for the partial recovery of direct
and indirect costs from the specified government agency, generally requiring
us to absorb from 25% to 50% of contract costs incurred. Total revenues
increased to $11.0 million for the year ended December 31, 1999 from $6.5
million for the year ended December 31, 1998. The increase is the result of
government contract activity in 1999 that was not in place in 1998, combined
with the contract revenue from the delivery of PEM fuel cells and related
engineering and testing support services for other customers. As a result, we
will report losses on these contracts as well as any future government
contracts awarded.
We expect to begin manufacturing pre-commercial residential fuel cell
systems during 2000. GE Fuel Cell Systems has committed to purchase from us,
on a take or pay basis, 485 of the pre-commercial residential fuel cell
systems prior to December 31, 2000. The total sales price for these units will
be approximately $10.3 million.
Cost of revenues. Cost of contract revenue includes compensation and
benefits for the engineering and related support staff, fees paid to outside
suppliers for subcontracted components and services, fees paid to consultants
for services provided, materials and supplies used and other directly
allocable general overhead costs allocated to specific government contracts.
Cost of contract revenue was $15.5 million for the year ended December 31,
1999, as compared to $8.9 million for the year ended December 31, 1998. The
increase in contract costs was related to the additional government grant
activity, combined with the additional staff and related support costs
necessary to earn the additional contract revenue. The result was a loss on
contracts of $4.5 million for the year ended December 31, 1999 compared to a
loss on contracts of $2.3 million for the year ended December 31, 1998.
We expect the cost to produce our initial systems to be higher than their
sales price under the terms of our arrangements with our two distributors, GE
Fuel Cell Systems and Edison Development. We expect to continue to experience
costs in excess of product sales until we achieve higher production levels,
which we do not expect to occur until after 2002.
17
Research and Development. Research and development expense includes
compensation and benefits for the engineering and related staff, expenses for
contract engineers, materials to build prototype units, fees paid to outside
suppliers for subcontracted components and services, supplies used, facility
related costs, such as computer and network services and other general
overhead costs. Research and development expenses increased to $20.5 million
for the year ended December 31, 1999 from $4.6 million for the year ended
December 31, 1998. The increase was a result of the growth of Plug Power's
research and development activities focused on residential PEM fuel cell
systems.
We expect to significantly increase our spending on research and
development in order to bring our residential PEM fuel cell systems to the
marketplace by 2001.
Interest Expense. Interest expense of $189,586 consists of interest on a
long-term obligation related to a real estate purchase agreement with
Mechanical Technology (see "Liquidity and Capital Resources--Capital
Contributions") and interest paid on capital lease obligations.
General and Administrative. General and administrative expense includes
compensation, benefits and related costs in support of our general corporate
functions, including general management, finance and accounting, human
resources, business development, information and legal services. General and
administrative expenses increased to $9.9 million for the year ended December
31, 1999 from $2.8 million for the year ended December 31, 1998. The increase
was in part due to a $2.3 million charge for non-cash stock-based
compensation, a $1.9 million charge for the write-off of deferred rent, both
further explained below, an $800,000 charge to earnings for the modification
of a stock option agreement and an increase in compensation, benefits and
related costs in support of the Company's overall growth.
The $2.3 million charge for non-cash stock-based compensation represents
the aggregate fair value of stock granted to Mechanical Technology. Our
original formation agreements provided for Mechanical Technology to earn non-
cash credits relating to services it rendered prior to our formation in
connection with securing future government contracts. Upon our formation,
Mechanical Technology contributed its fuel cell operations to us and we
received the right to these government contracts if ever awarded in the
future. When these contracts were awarded to us, Mechanical Technology earned
the non-cash credits, entitling it to receive 2,250,000 shares of common stock
with a fair value at the time of grant of $2.3 million. Accordingly, we
recognized $2.3 million in non-cash stock-based compensation expense during
the year ended December 31, 1999.
In June 1999, we entered into a real estate purchase agreement with
Mechanical Technology to acquire our current facility, a portion of which we
previously leased from Mechanical Technology. As a result, we wrote off
deferred rent expense in the amount of $1.9 million. We originally recorded
$2.0 million for deferred rent in October 1998, representing the value of a
10-year lease agreement with Mechanical Technology at favorable lease rates.
See "Liquidity and Capital Resources--Capital Contributions."
Other Income. Other income consists of interest income earned on our cash
and cash equivalents. Other income increased to $3.1 million for the year
ended December 31, 1999 from $93,000 for the year ended December 31, 1998. The
increase was due to interest earned on higher balances of cash and cash
equivalents available during the fourth quarter of 1999 as a result of our
initial public offering of common stock and the exercise of warrants and stock
purchase commitments by our existing stockholders. See "Liquidity and Capital
Resources."
Equity in losses of affiliate. Equity in losses of affiliate of ($1.5)
million is our proportionate share of the losses of GE Fuel Cell Systems
($440,500) and goodwill amortization ($1,031,250) for the year ended
December 31, 1999, which we account for under the equity method of accounting.
See "Liquidity and Capital Resources--GE Fuel Cell Systems."
Income Taxes. No benefit for federal and state income taxes has been
reported in the financial statements because we were taxed as a partnership
prior to November 3, 1999 and the federal and state income tax benefits
18
of our losses were recorded by our stockholders. Effective on November 3,
1999, we merged into a C corporation and began accounting for income taxes in
accordance with Statement of Financial Accounting Standards No. 109 (SFAS
109), "Accounting for Income Taxes." The deferred tax asset generated from our
net operating loss for the period from November 3, 1999 through December 31,
1999 has been offset by a full valuation allowance.
Comparison of the Year Ended December 31, 1998 and the Period from June 27,
1997 (Date of Inception) to December 31, 1997
Revenues. Our revenues during this period were derived exclusively from
cost reimbursement government contracts relating to the development of PEM
fuel cell technology. These contracts provide for the partial recovery of
direct and indirect costs from the specified government agency, generally
requiring us to absorb from 25% to 50% of contract costs incurred. Contract
revenues increased to $6.5 million for the year ended December 31, 1998 from
$1.2 million for the period from inception through December 31, 1997. This
increase was due to twelve months of activity in 1998 compared to six months
in the period from inception through December 31, 1997, combined with
increased government contract activities.
Cost of revenues. Cost of contract revenue includes compensation and
benefits for the engineering and related support staff, fees paid to outside
suppliers for subcontracted components and services, fees paid to consultants
for services provided, materials and supplies used and other directly
allocable general overhead costs allocated to specific government contracts.
Cost of contract revenue was $8.9 million for the year ended December 31, 1998
as compared to $1.2 million for the period from inception through December 31,
1997. This increase in costs was due to twelve months of activity in 1998
compared to six months in the period from inception through December 31, 1997,
combined with the additional staff and related support costs necessary to earn
the additional contract revenue as reported. The result was a loss on
contracts of $33,000 for the period from inception to December 31, 1997
compared to a loss on contracts of $2.3 million for the year ended December
31, 1998.
Research and Development. Research and development expense includes
compensation and benefits for the engineering and related staff, expenses for
contract engineers, materials to build prototype units, fees paid to outside
suppliers for subcontracted components and services, supplies used, facility
related costs, such as computer and network services and other general
overhead costs. Research and development expenses increased to $4.6 million
for the year ended December 31, 1998 from $1.3 million in the period from
inception through December 31, 1997, an increase of $3.3 million. This
increase was related to Plug Power's research and development activities
focused on residential PEM fuel cell systems in the year ended December 31,
1998 over that expensed for the period from inception through December 31,
1997.
At inception, we recorded a $4.0 million in-process research and
development expense related to Mechanical Technology's initial equity
contribution. Two unaffiliated parties, Edison Development and Mechanical
Technology, negotiated at arm's length to form Plug Power and determined that
the total value of the in-process research and development, fixed assets, and
trained workforce contributed by Mechanical Technology was $4.8 million.
Accordingly, we have allocated the investment as follows (in thousands):
In-process research and development.............................. $4,043
Fixed assets..................................................... 357
Trained workforce................................................ 350
The in-process research and development contributed by Mechanical
Technology upon our formation related exclusively to the development of PEM
fuel cells and fuel cell systems. This project was the only one in process
when it was contributed and was in its early stages of development.
The Mechanical Technology contribution included research and test results
related to the validation of initial plate and flow field designs, as well as
cooling and humidification schemes and initial designs regarding systems
integration. This initial work provided the framework to facilitate our
continuing efforts to commercialize the
19
technology. At the time of Mechanical Technology's contribution, neither the
cost nor the time required to complete this project and its successful
commercialization was known. We have produced and are currently demonstrating
a number of test and evaluation systems and are continuing our efforts to
decrease the cost of our system's components and subsystems, improve its
overall reliability and efficiency, and ensure its safety. We must complete
substantial additional research and development on our fuel cell systems and
secure relationships with suppliers of our required components and subsystems
before we will have a commercially viable product.
The amount allocated to the in-process research and development contributed
to us by Mechanical Technology represents its estimated fair value based on
the negotiations of the two parties and is consistent with its value under the
cost valuation approach. Under the cost valuation approach, value is measured
by quantifying the cost of replacing the future service capability of the
acquired property without considering the amount of economic benefits that can
be achieved, or the time period over which they might continue.
The contributed in-process research and development was early development
stage property, which did not and currently does not have commercial viability
or any alternative future use and which will require substantial additional
expenditures to commercialize. Accordingly, we charged the assigned value to
operations at the time of contribution.
General and Administrative. General and administrative expense includes
compensation, benefits and related costs in support of our general corporate
functions, including general management, finance and accounting, human
resources, business development, information and legal services. General and
administrative expenses increased to $2.8 million for the year ended December
31, 1998 from $630,000 for the period from inception through December 31,
1997. The increase was due to twelve months of activity in 1998 compared to
six months in the period from inception through December 31, 1997, combined
with increased personnel cost and general expenses associated with expanding
operations.
Other Income. Other income consists of interest income earned on our cash
and cash equivalents. Other income was $93,000 for the year ended December 31,
1998 and $103,000 for the period from inception through December 31, 1997.
Income Taxes. No benefit for federal and state income taxes is reported in
the financial statements, since before the merger, which occurred immediately
before the closing of the Initial Public Offering, we had elected to be taxed
as a partnership. Therefore, for the periods presented, the federal and state
income tax benefits of our losses were recorded by our stockholders.
Subsequent to our conversion from a limited liability company to a C
corporation, we account for income taxes in accordance with SFAS 109.
Liquidity and Capital Resources
Summary
Our cash requirements depend on numerous factors, including completion of
our product development activities, ability to commercialize our residential
fuel cell systems, market acceptance of our systems and other factors. We
expect to devote substantial capital resources to continue our development
programs directed at commercializing our fuel cell systems for worldwide
residential use, to hire and train our production staff, develop and expand
our manufacturing capacity, begin production activities and expand our
research and development activities. We anticipate incurring substantial
additional losses over at least the next several years and believe that our
current cash balances will provide us with sufficient capital to fund
operations through 2001.
We have financed our operations through December 31, 1999, primarily from
the sale of equity, which has provided us cash of $223.7 million. As of
December 31, 1999, we had cash and cash equivalents totaling $171.5 million.
As a result of our purchase of real estate from Mechanical Technology, we have
escrowed $5.8 million in cash to collateralize the debt assumed on the
purchase. Since inception, net cash used in operating activities has been
$32.5 million and cash used in investing activities has been $13.5 million.
For the reasons stated above, we expect that our cash requirements will
increase in future periods.
20
Initial Public Offering
In November 1999, the Company completed an initial public offering of
6,782,900 shares of common stock (the "Initial Public Offering") which
includes additional shares purchased pursuant to exercise of the underwriters'
overallotment option. We received proceeds of $93.0 million, which was net of
$8.7 million of expenses and underwriting discounts relating to the issuance
and distribution of the securities.
Capital Contributions
Plug Power was formed in June 1997 as a joint venture between Mechanical
Technology and Edison Development. At formation, Mechanical Technology
contributed assets related to its fuel cell program, including intellectual
property, 22 employees, equipment, and the right to receive government
contracts for research and development of PEM fuel cell systems, if awarded.
Edison Development contributed or committed to contribute $9.0 million in
cash, expertise in distributed power generation and marketplace presence to
distribute and sell stationary fuel cell systems.
In January 1999, we entered into an agreement with Mechanical Technology
and Edison Development pursuant to which we had the right to require Edison
Development and Mechanical Technology to make capital contributions of $22.5
million each, an aggregate of $45 million, through December 31, 2000. The
agreement terminated upon the Initial Public Offering and permitted Mechanical
Technology and Edison Development to contribute any funds not previously
called by us in exchange for shares at a price of $7.50 per share. In
September 1999, we made a capital call of $4.0 million, and Mechanical
Technology and Edison Development each contributed $2.0 million in cash in
exchange for 266,667 shares of common stock. Both Mechanical Technology and
Edison Development contributed the remaining $41.0 million immediately prior
to the Initial Public Offering in exchange for an aggregate of 5,466,666
shares of common stock.
In June 1999 we entered into a real estate purchase agreement with
Mechanical Technology to acquire approximately 36 acres of land, two
commercial buildings, and a residential building located in Latham, New York.
This property is the location of our current facilities including a newly
constructed production facility. As part of the real estate transaction with
Mechanical Technology, we assumed a $6.2 million letter of credit issued by
KeyBank National Association for the express purpose of servicing $6.2 million
of debt related to Industrial Development Revenue Bonds issued by the Town of
Colonie Industrial Development Agency. As consideration for the purchase, we
issued 704,315 shares of common stock to Mechanical Technology, valued at
$6.67 per share. The transaction closed in July 1999 and a receivable for
membership interests of $4.7 million was recorded as shares subscribed as of
June 30, 1999. In connection with this transaction, we wrote off deferred rent
expense in the amount of $1.9 million during the first six months of 1999.
This deferred rent expense related to a 10-year facilities lease, at a
favorable lease rate, on one of the purchased buildings. In connection with
the July 1999 closing, we agreed to lease some of the office and manufacturing
space back to Mechanical Technology on a short-term basis.
Also in June 1999, Edison Development purchased 704,315 shares of common
stock for $4.7 million in cash under provisions of our original formation
documents that allowed Edison Development and Mechanical Technology to
maintain equal ownership percentage in Plug Power.
As of December 31, 1999, Mechanical Technology had made aggregate cash
contributions of $27.0 million plus non-cash contributions of $14.2 million,
while Edison Development had made aggregate cash contributions of $41.2
million.
GE Fuel Cell Systems
In February 1999, we entered into an agreement with GE MicroGen, Inc.
(formerly GE On-Site Power) to create GE Fuel Cell Systems, a joint venture
owned 75% by GE MicroGen and 25% by Plug Power, which is dedicated to
marketing, selling, installing, and servicing Plug Power residential fuel cell
systems on a worldwide basis (other than in the states of Illinois, Indiana,
Michigan and Ohio). See "Business--Distribution and Marketing."
21
In connection with the formation of GE Fuel Cell Systems, we issued
2,250,000 shares of our common stock to GE MicroGen, Inc. in exchange for a
25% interest in GE Fuel Cell Systems. Of these, 750,000 shares vested
immediately and the remaining 1,500,000 shares vested in August 1999. As of
the date of issuance of such shares, we capitalized $11.3 million, the fair
value of the shares issued, under the caption "Investment in affiliate" in our
financial statements. We also issued a warrant to GE MicroGen to purchase
3,000,000 additional shares of common stock at a price of $12.50 per share
which was exercised by GE MicroGen immediately prior to the Initial Public
Offering, for a total exercise price of $37.5 million in cash.
General Electric has agreed to provide capital to GE Fuel Cell Systems, in
the form of loans, to fund GE Fuel Cell Systems' commitment to purchase 485
pre-commercial systems during the period ending December 31, 2000. General
Electric has also agreed to provide additional capital, in the form of a loan
not to exceed $8.0 million, to fund GE Fuel Cell Systems' ongoing operations.
Southern California Gas Company
In April 1999, Southern California Gas Company purchased 1,000,000 shares
of common stock for $6.7 million and agreed to spend $840,000 for market
research and services related to distributed power generation technologies,
including PEM fuel cell systems. In the event Southern California Gas does not
expend these amounts by April 2002, up to 111,851 previously issued shares may
be returned. Additionally, Southern California Gas received warrants to
purchase an additional 350,000 shares of common stock at an exercise price of
$8.50 per share which was exercised by Southern California Gas immediately
prior to the Initial Public Offering, for a total exercise price of $3.0
million in cash.
Private Investors
In February 1999, two investors, including Michael J. Cudahy, a director of
Plug Power, purchased 1,500,000 shares of common stock for a total of $10.0
million. In addition, Mr. Cudahy received a warrant to purchase 400,000 shares
of common stock at a price of $8.50 per share which was exercised by Mr.
Cudahy immediately prior to our initial public offering, for a total exercise
price of $3.4 million in cash.
In April 1999 an unrelated investor purchased 299,850 common shares for
$2.0 million.
Grant Agreement
The Company was awarded and received $1.0 million under a government grant.
The grant is for the express purpose of promoting employment. Terms of the
grant require the Company to meet certain employment criteria, as defined,
over a five year period. If the Company fails to meet the specified criteria,
the Company shall repay the unearned portion of the grant.
Impact of Year 2000
In late 1999, we completed a review and evaluation of the potential impact
that the change in the date to the Year 2000 will have on our computer systems
and concluded that all of our major computer systems were able to recognize
and appropriately process dates commencing in the Year 2000. As a result of
those planning and implementation efforts, the Company experienced no
significant disruptions in mission critical information technology and non-
information technology systems and believes those systems successfully
responded to the Year 2000 date change.
Our historical cost to assess our Year 2000 readiness has been negligible.
The Company is not aware of any material problems resulting from Year 2000
issues, either with its internal systems, or the products and services of
third parties. We will continue to monitor our mission critical computer
applications and those of our suppliers and vendors throughout the year 2000
to ensure that any latent Year 2000 matters that may arise are addressed
promptly.
22
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 8. Financial Statements and Supplementary Data
The index to the Financial Statements of the Company is included in Item 14,
and the financial statements follow the signature page to this Annual Report on
Form 10-K.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
23
PART III
Item 10. Directors and Executive Officers of the Registrant
(a) Directors
Incorporated herein by reference is the information appearing under the
caption "Information Regarding Directors" in the Company's definitive Proxy
Statement for its 2000 Annual Meeting of Stockholders.
(b) Executive Officers
Incorporated herein by reference is the information appearing under the
caption "Executive Officers" in the Company's definitive Proxy Statement for
its 2000 Annual Meeting of Stockholders.
Item 11. Executive Compensation
Incorporated herein by reference is the information appearing under the
caption "Executive Compensation" in the Company's definitive Proxy Statement
for its 2000 Annual Meeting of Stockholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated herein by reference is the information appearing under the
caption "Principal Stockholders" in the Company's definitive Proxy Statement
for its 2000 Annual Meeting of Stockholders.
Item 13. Certain Relationships and Related Transactions
Incorporated herein by reference is the information appearing under the
caption "Certain Relationships and Related Transactions" in the Company's
definitive Proxy Statement for its 2000 Annual Meeting of Stockholders.
24
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
14(a)(1) Financial Statements
The financial statements and notes are listed in the Index to Financial
Statements on page F-1 of this report.
14(a)(2) Financial Statement Schedules
None of the schedules for which provision is made in the applicable
accounting regulations under the Securities Exchange Act of 1934, as amended,
are required.
14(a)(3) Exhibits
Exhibits are as set forth in the "Index to Exhibits" which immediately
precedes the Notes to the Financial Statements and the exhibits filed.
14(b) Reports on Form 8-K
On November 16, 1999, we filed a Form 8-K with the Securities and Exchange
Commission to report the receipt of correspondence threatening litigation by
DCT, Inc.
14(c) Exhibits
Exhibits are as set forth in the "Index to Exhibits" which immediately
precedes the Notes to the Financial Statements and the exhibits filed.
14(d) Other Financial Statements
Not applicable.
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
PLUG POWER INC.
/s/ Gary Mittleman
Date: March 29, 2000 By: _________________________________
Gary Mittleman, President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Gary Mittleman President, Chief Executive March 29, 2000
____________________________________ Officer and Director
Gary Mittleman (Principal Executive
Officer)
/s/ William H. Largent Chief Financial Officer March 29, 2000
____________________________________ (Principal Financial
William H. Largent Officer and Accounting
Officer)
/s/ Michael J. Cudahy Director March 29, 2000
____________________________________
Michael J. Cudahy
/s/ Anthony F. Earley, Jr. Director March 29, 2000
____________________________________
Anthony F. Earley, Jr.
/s/ Larry G. Garberding Director March 29, 2000
____________________________________
Larry G. Garberding
/s/ George C. McNamee Director March 29, 2000
____________________________________
George C. McNamee
/s/ Robert L. Nardelli Director March 29, 2000
____________________________________
Robert L. Nardelli
/s/ Walter L. Robb Director March 29, 2000
____________________________________
Walter L. Robb
/s/ John M. Shalikashvili Director March 29, 2000
____________________________________
John M. Shalikashvili
26
List of Exhibits
Certain exhibits indicated below are incorporated by reference to documents
of Plug Power on file with the Commission. Each exhibit marked by an asterisk
(*) was previously filed as an exhibit to Plug Power's Registration Statement
on Form S-1 (No. 333-86089) and the number in parentheses following the
description of the exhibit refers to the exhibit number in the Form S-1.
Exhibits nos. 10.25, 10.28, 10.29, 10.30, 10.31, 10.32, 10.33 and 10.34
represent the management contracts or compensation plans filed pursuant to Item
14(c) of the Form 10-K.
Exhibit
Number Description
------- -----------
2.1* Agreement and Plan of Merger by and between Plug Power and Plug
Power, LLC, a Delaware limited liability company, dated as of
October 7, 1999. (2.1)
3.1 Amended and Restated Certificate of Incorporation of Plug Power.
3.2 Amended and Restated By-laws of Plug Power.
4.1* Specimen certificate for shares of common stock, $.01 par value,
of Plug Power.(4.1)
10.1* Amended and Restated Limited Liability Company Agreement of GE
Fuel Cell Systems, LLC, dated February 3, 1999, between GE On-
Site Power, Inc. and Plug Power, LLC.(10.1)
10.2* Contribution Agreement, dated as of February 3, 1999, by and
between GE On-Site Power, Inc. and Plug Power, LLC.(10.2)
10.3* Trademark and Trade Name Agreement, dated as of February 2,
1999, between General Electric Company and GE Fuel Cell
Systems, LLC.(10.3)
10.4* Trademark Agreement, dated as of February 2, 1999, between Plug
Power LLC and GE Fuel Cell Systems, LLC.(10.4)
10.5* Distributor Agreement, dated as of February 2, 1999, between GE
Fuel Cell Systems, LLC and Plug Power, LLC.(10.5)
10.6* Side letter agreement, dated February 3, 1999, between General
Electric Company and Plug Power LLC.(10.6)
10.7* Mandatory Capital Contribution Agreement, dated as of January
26, 1999, between Edison Development Corporation, Mechanical
Technology Incorporated and Plug Power, LLC and amendments
thereto, dated August 25, 1999 and August 26, 1999.(10.7)
10.8* LLC Interest Purchase Agreement, dated as of February 16, 1999,
between Plug Power, LLC and Michael J. Cudahy.(10.8)
10.9* Warrant Agreement, dated as of February 16, 1999, between Plug
Power, LLC and Michael J. Cudahy and amendment thereto, dated
July 26, 1999.(10.9)
10.10* LLC Interest Purchase Agreement, dated as of February 16, 1999,
between Plug Power, LLC and Kevin Lindsey.(10.10)
10.11* LLC Interest Purchase Agreement, dated as of April 1, 1999,
between Plug Power, LLC and Antaeus Enterprises, Inc.(10.11)
10.12* LLC Interest Purchase Agreement, dated as of April 9, 1999,
between Plug Power, LLC and Southern California Gas
Company.(10.12)
10.13* Warrant Agreement, dated as of April 9, 1999, between Plug
Power, LLC and Southern California Gas Company and amendment
thereto, dated August 26, 1999.(10.13)
10.14* Agreement, dated as of June 26, 1997, between the New York State
Energy Research and Development Authority and Plug Power LLC,
and amendments thereto dated as of December 17, 1997 and March
30, 1999.(10.14)
10.15* Agreement, dated as of January 25, 1999, between the New York
State Energy Research and Development Authority and Plug Power
LLC.(10.15)
Exhibit
Number Description Page No.
------- ----------- --------
10.16* Agreement, dated as of September 30, 1997, between Plug
Power LLC and the U.S. Department of Energy.(10.16)
10.17* Cooperative Agreement, dated as of September 30, 1998,
between the National Institute of Standards and Technology
and Plug Power, LLC, and amendment thereto dated May 10,
1999.(10.17)
10.18* Joint venture agreement, dated as of June 14, 1999 between
Plug Power, LLC, Polyfuel, Inc., and SRI
International.(10.18)
10.19* Cooperative Research and Development Agreement, dated as of
February 12, 1999, between Plug Power, LLC and U.S. Army
Benet Laboratories.(10.19)
10.20* Nonexclusive License Agreement, dated as of April 30, 1993,
between Mechanical Technology Incorporated and the Regents
of the University of California.(10.20)
10.21* Development Collaboration Agreement, dated as of July 30,
1999, by and between Joh. Vaillant GmbH. u. CO. and Plug
Power, LLC.(10.21)
10.22* Agreement of Sale, dated as of June 23, 1999, between
Mechanical Technology, Incorporated and Plug Power
LLC.(10.22)
10.23* Assignment and Assumption Agreement, dated as of July 1,
1999, between the Town of Colonie Industrial Development
Agency, Mechanical Technology, Incorporated, Plug Power,
LLC, KeyBank, N.A., and First Albany Corporation.(10.23)
10.24* Replacement Reimbursement Agreement, dated as of July 1,
1999, between Plug Power, LLC and KeyBank, N.A.(10.24)
10.25* 1997 Membership Option Plan and amendment thereto dated
September 27, 1999.(10.25)
10.26* Trust Indenture, dated as of December 1, 1998, between the
Town of Colonie Industrial Development Agency and
Manufacturers and Traders Trust Company, as
trustee.(10.26)
10.27* Distribution Agreement, dated as of June 27, 1997, between
Plug Power, LLC and Edison Development Corporation and
amendment thereto dated September 27, 1999.(10.27)
10.28* Agreement, dated as of June 27, 1999, between Plug Power,
LLC and Gary Mittleman.(10.28)
10.29* Agreement, dated as of June 8, 1999, between Plug Power,
LLC and Louis R. Tomson.(10.29)
10.30* Agreement, dated as of August 6, 1999, between Plug Power,
LLC and Gregory A. Silvestri.(10.30)
10.31* Agreement, dated as of August 12, 1999, between Plug Power,
LLC and William H. Largent.(10.31)
10.32* Agreement, dated as of August 20, 1999, between Plug Power,
LLC and Dr. Manmohan Dhar.(10.32)
10.33* 1999 Stock Option and Incentive Plan.(10.33)
10.34* Employee Stock Purchase Plan(10.34)
10.35* Agreement, dated as of August 27, 1999, by Plug Power, LLC,
Plug Power Inc., GE On-Site Power, Inc., GE Power Systems
Business of General Electric Company, and GE Fuel Cell
Systems, L.L.C.(10.35)
10.36 Registration Rights Agreement between the Registrant and
the stockholders of the Registrant.
10.37 Registration Rights Agreement between Plug Power, L.L.C. and GE On-Site Power, Inc.
21.1 Schedule of Subsidiaries of the Company
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule.
- --------
* Previously filed.
PLUG POWER INC.
(A Development Stage Enterprise)
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of independent accountants....................................... F-2
Balance sheets as of December 31, 1999 and 1998......................... F-3
Statements of operations for the years ended December 31, 1999 and 1998
and for the period from June 27, 1997 (date of inception) to December
31, 1997, and cumulative amounts from inception........................ F-4
Statements of stockholders' equity for the years ended December 31, 1999
and 1998 and the period from June 27, 1997 (date of inception) to
December 31, 1997...................................................... F-5
Statements of cash flows for the years ended December 31, 1999 and 1998
and the period from June 27, 1997 (date of inception) to December 31,
1997 and cumulative amounts from inception............................. F-6
Notes to financial statements........................................... F-7
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity and cash flows present fairly, in all
material respects, the financial position of Plug Power Inc. (a development
stage enterprise) at December 31, 1999 and 1998, and the results of its
operations and its cash flows for the years ended December 31, 1999 and 1998
and for the period from June 27, 1997 (date of inception) to December 31,
1997, in conformity with accounting principles generally accepted in the
United States. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Albany, New York
February 8, 2000
F-2
PLUG POWER INC.
(A Development Stage Enterprise)
BALANCE SHEETS
December 31,
--------------------------
1999 1998
------------ ------------
ASSETS
------
Current assets:
Cash and cash equivalents, principally commercial
paper........................................... $171,496,286 $ 3,993,122
Restricted cash.................................. 275,000 --
Accounts receivable.............................. 5,212,943 599,955
Inventory........................................ 304,711 14,647
Other current assets............................. 124,380 --
Due from investor................................ -- 685,306
------------ ------------
Total current assets........................... 177,413,320 5,293,030
Restricted cash.................................... 5,600,274 --
Property, plant and equipment, net................. 23,333,791 2,753,492
Investment in affiliate............................ 9,778,250 --
Other assets....................................... -- 46,913
------------ ------------
Total assets................................... $216,125,635 $ 8,093,435
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable................................. $ 4,644,496 $ 568,007
Acrrued expenses................................. 3,004,126 1,746,239
Deferred grant revenue........................... 200,000 --
Due to investor.................................. -- 286,492
Current portion of capital lease obligation and
long-term debt.................................. 353,175 --
------------ ------------
Total current liabilities...................... 8,201,797 2,600,738
Long-term debt................................... 5,600,274 --
Deferred grant revenue........................... 800,000 --
Capital lease obligation......................... 117,030 --
------------ ------------
Total liabilities.............................. 14,719,101 2,600,738
------------ ------------
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value per share;
5,000,000 shares authorized; none issued and
outstanding..................................... -- --
Common stock, $0.01 par value per share;
95,000,000 shares authorized; 43,015,508 shares
issued and outstanding, December 31, 1999 and
17,150,000 December 31, 1998.................... 430,155 171,500
Paid-in capital.................................. 249,964,994 20,840,500
Deficit accumulated during the development
stage........................................... (48,988,615) (15,519,303)
------------ ------------
Total stockholders' equity..................... 201,406,534 5,492,697
------------ ------------
Total liabilities and stockholders' equity..... $216,125,635 $ 8,093,435
============ ============
F-3
PLUG POWER INC.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
For the years ended December 31, 1999 and 1998, the period from June 27, 1997
(date of inception)
to December 31, 1997, and cumulative amounts from inception
Cumulative
December 31, December December Amounts from
1999 31, 1998 31, 1997 Inception
------------ ----------- ----------- ------------
Contract revenue........ $ 11,000,344 $ 6,541,040 $ 1,193,530 $ 18,734,914
Cost of contract
revenue................ 15,497,837 8,863,845 1,226,443 25,588,125
------------ ----------- ----------- ------------
Loss on contracts....... (4,497,493) (2,322,805) (32,913) (6,853,211)
In-process research and
development............ -- -- 4,042,640 4,042,640
Research and development
expense................ 20,506,156 4,632,729 1,300,877 26,439,762
General and
administrative
expense................ 9,928,282 2,753,645 630,033 13,311,960
Interest expense........ 189,586 -- -- 189,586
------------ ----------- ----------- ------------
Operating loss........ (35,121,517) (9,709,179) (6,006,463) (50,837,159)
Interest income......... 3,123,955 93,216 103,123 3,320,294
------------ ----------- ----------- ------------
Loss before equity in
losses of affiliate.. (31,997,562) (9,615,963) (5,903,340) (47,516,865)
Equity in losses of
affiliate.............. (1,471,750) -- -- (1,471,750)
------------ ----------- ----------- ------------
Net loss.............. $(33,469,312) $(9,615,963) $(5,903,340) $(48,988,615)
============ =========== =========== ============
Loss per share:
Basic and diluted..... $ (1.27) $ (0.71) $ (0.62)
============ =========== ===========
Weighted average number
of common shares
outstanding............ 26,282,705 13,616,986 9,500,000
============ =========== ===========
F-4
PLUG POWER INC.
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended December 31, 1999 and 1998, and the
period from June 27, 1997 (date of inception) to December 31, 1997
Deficit
Accumulated
Common stock Additional During the Total
------------------- Paid-in Development Stockholders'
Shares Amount Capital Stage Equity
---------- -------- ------------ ------------ -------------
Balance, June 27, 1997.. -- $ -- $ -- $ -- $ --
Capital contributions... 9,500,000 95,000 9,405,000 9,500,000
Net loss................ (5,903,340) (5,903,340)
---------- -------- ------------ ------------ ------------
Balance, December 31,
1997................... 9,500,000 95,000 9,405,000 (5,903,340) 3,596,660
Capital contributions... 7,650,000 76,500 13,173,500 13,250,000
Deferred rent expense... (2,000,000) (2,000,000)
Amortization of deferred
rent expense........... 50,000 50,000
Compensatory options.... 212,000 212,000
Net loss................ (9,615,963) (9,615,963)
---------- -------- ------------ ------------ ------------
Balance, December 31,
1998................... 17,150,000 171,500 20,840,500 (15,519,303) 5,492,697
Initial public
offering--net.......... 6,782,900 67,829 92,904,049 92,971,878
Capital contributions... 19,058,480 190,585 119,749,979 119,940,564
Stock issued for equity
in affiliate........... 11,250,000 11,250,000
Stock based
compensation........... 2,250,000 2,250,000
Amortization of deferred
rent expense........... 100,000 100,000
Write-off deferred rent
expense................ 1,850,000 1,850,000
Compensatory stock
options................ 978,800 978,800
Stock option exercises.. 24,128 241 41,666 41,907
Net loss................ (33,469,312) (33,469,312)
---------- -------- ------------ ------------ ------------
Balance, December 31,
1999................... 43,015,508 $430,155 $249,964,994 $(48,988,615) $201,406,534
========== ======== ============ ============ ============
F-5
PLUG POWER INC.
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1999 and 1998, the period from June 27, 1997
(date of inception)
to December 31, 1997, and cumulative amounts from inception
Cumulative
December 31, December December Amounts from
1999 31, 1998 31, 1997 Inception
------------ ----------- ----------- ------------
Cash Flows From
Operating Activities:
Net loss................ $(33,469,312) $(9,615,963) $(5,903,340) $(48,988,615)
Adjustments to reconcile
net loss to net cash
used in operating
activities:
Depreciation and
amortization......... 1,352,186 499,142 187,708 2,039,036
In-process research
and development...... -- -- 4,042,640 4,042,640
Equity in losses of
affiliate............ 1,471,750 -- -- 1,471,750
Amortization of
deferred rent........ 100,000 50,000 -- 150,000
Write-off of deferred
rent................. 1,850,000 -- -- 1,850,000
In-kind services...... -- 500,000 -- 500,000
Stock based
compensation......... 2,250,000 -- -- 2,250,000
Compensatory options.. 978,800 212,000 -- 1,190,800
Changes in assets and
liabilities:
Accounts receivable... (4,612,988) 203,602 (803,557) (5,212,943)
Inventory............. (290,064) 18,903 (33,550) (304,711)
Due from investor..... 685,306 (685,306) -- --
Other assets.......... (102,466) -- -- (102,466)
Accounts payable and
accrued expenses..... 5,334,376 1,081,587 1,184,551 7,600,514
Deferred grant
revenue.............. 1,000,000 -- -- 1,000,000
Due to investor....... (286,492) 269,245 17,247 --
------------ ----------- ----------- ------------
Net cash used in
operating
activities......... (23,738,904) (7,466,790) (1,308,301) (32,513,995)
------------ ----------- ----------- ------------
Cash Flows From
Investing Activities:
Purchase of property,
plant and equipment.... (10,788,262) (2,370,269) (361,518) (13,520,049)
------------ ----------- ----------- ------------
Cash used in
investing
activities......... (10,788,262) (2,370,269) (361,518) (13,520,049)
------------ ----------- ----------- ------------
Cash Flows From
Financing Activities:
Contributed capital... 115,242,782 10,750,000 4,750,000 130,742,782
Proceeds from initial
public offering,
net.................. 94,611,455 -- -- 94,611,455
Stock issuance costs.. (1,639,577) -- -- (1,639,577)
Proceeds from stock
option exercises..... 41,907 -- -- 41,907
Cash placed in
escrow............... (5,875,274) -- -- (5,875,274)
Principal payments on
capital lease
obligations.......... (65,963) -- -- (65,963)
Principal payments on
long-term debt....... (285,000) -- -- (285,000)
------------ ----------- ----------- ------------
Net cash provided by
financing
activities......... 202,030,330 10,750,000 4,750,000 217,530,330
------------ ----------- ----------- ------------
Increase in cash and
cash equivalents....... 167,503,164 912,941 3,080,181 171,496,286
Cash and cash
equivalents, beginning
of period.............. 3,993,122 3,080,181 -- --
------------ ----------- ----------- ------------
Cash and cash
equivalents, end of
period................. $171,496,286 $ 3,993,122 $ 3,080,181 $171,496,286
============ =========== =========== ============
F-6
PLUG POWER INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS
1. Nature of Operations
Plug Power Inc. (the Company), was originally formed as a joint venture
between Edison Development Corporation (EDC) and Mechanical Technology
Incorporated (MTI) in the State of Delaware on June 27, 1997 and succeeded by
merger of all of the assets, liabilities and equity of Plug Power, L.L.C. in
November 1999. The Company is a development stage enterprise formed to
research, develop, manufacture and distribute fuel cells for electric power
generation.
2. Initial Public Offering
In November 1999, the Company completed an initial public offering of
6,782,900 shares of common stock, including 782,900 shares pursuant to the
underwriters' exercise of their over-allotment option (the Initial Public
Offering). The Company received proceeds of $93.0 million, which was net of
$8.7 million of expenses and underwriting discounts relating to the issuance
and distribution of the securities. In connection with this offering, the
Company was converted to a C corporation from a limited liability corporation.
The financial statements and related footnotes have been restated to present
the Company as a C corporation for all periods presented.
3. Significant Accounting Policies
Use of estimates:
The financial statements of the Company have been prepared in conformity
with generally accepted accounting principles which require management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents:
Cash and cash equivalents includes cash on hand and short term investments
with original maturities of three months or less.
The Company has restricted cash in the amount of $5,875,274 which the
Company was required to place in escrow to collateralize debt related to its
purchase of real estate. The escrowed amount is recorded under the balance
sheet captions Restricted cash.
Inventory:
Inventory is stated at lower of cost (first-in, first-out) or market, and
consists of raw materials not yet issued to research projects.
Property, plant and equipment, and long-lived assets:
Property, plant and equipment are stated at cost and are depreciated using
the straight-line method over their estimated useful lives ranging from 2 to
20 years.
The Company reviews long-lived assets for impairment whenever any events or
changes in circumstances indicate that the carrying amount of these assets may
not be recoverable.
F-7
PLUG POWER INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue recognition:
The Company's contract revenue is derived from cost reimbursement
government contracts which generally require the Company to absorb from 25% to
50% of the total costs incurred. Such contracts require the Company to deliver
research and tangible developments in fuel cell technology and system design
and prototype fuel cell systems for test and evaluation by the government
agency. Revenues are recognized in proportion to the costs incurred. Included
in accounts receivable are billed and unbilled work-in-progress on cost
reimbursed government contracts. Total estimated cost to complete a contract
in excess of the awarded contract amounts are charged to operations during the
period such costs are estimated. While the Company's accounting for these
contract costs are subject to audit by the sponsoring agency, in the opinion
of management, no material adjustments are expected as a result of such
audits. At December 31, 1999, the Company had been awarded approximately $40
million of such government contracts to be earned in the future periods.
Deferred revenue:
The Company's deferred grant revenue consists of a government grant
received to promote employment. The agreement requires that the Company meet
certain employment criteria, as defined, over a five year period. If the
Company fails to meet the specified criteria, the Company shall repay the
unearned portion of the grant.
4. Property, Plant and Equipment
Property, plant and equipment at December 31, 1999 and 1998 consists of the
following:
December December 31,
31, 1999 1998
----------- ------------
Land.............................................. $ 90,000 $ --
Buildings......................................... 14,757,080 --
Construction in progress.......................... 58,373 --
Leasehold improvements............................ 2,768,190 97,889
Machinery and equipment........................... 7,436,619 3,104,887
----------- ----------
25,110,262 3,202,776
Less accumulated depreciation and amortization.... (1,776,471) (449,284)
----------- ----------
Property, plant and equipment, net................ $23,333,791 $2,753,492
=========== ==========
Depreciation expense was approximately $1,327,187 for the year ended
December 31, 1999, $332,476 for the year ended December 31, 1998, and $29,375
for the period from June 27, 1997 (date of inception) to December 31, 1997.
5. Debt
In connection with the Company's purchase of real estate in July, 1999, the
Company assumed a $6.2 million letter of credit issued by KeyBank National
Association for the express purpose of servicing $6.2 million of debt related
to Industrial Development Revenue Bonds issued by the Town of Colonie
Industrial Development Agency in favor of the acquired property. The debt
matures in 2013 and accrues interest at a variable rate of interest which was
approximately 6% at December 31, 1999. Simultaneous with the assumption, the
Company was required to escrow $6.2 million to collateralize the debt. The
escrowed amount is recorded under the balance sheet captions Restricted cash.
Principal payments due on long-term debt are: 2000, $275,000; 2001, $290,000;
2002, $310,000; 2003 $325,000; 2004 and thereafter, $4,675,275. Interest paid
in 1999 was $189,586.
F-8
PLUG POWER INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Income Taxes
The Company was a Limited Liability Company (LLC) until its merger into
Plug Power Inc. effective November 3, 1999. For the LLC period the Company was
treated as a partnership for federal and state income tax purposes and
accordingly the Company's income taxes or credits resulting from earnings or
losses were payable by, or accrued to its members. Therefore, no provision was
made for income taxes for financial statements prior to November 3, 1999. The
amount of LLC losses for the period January 1, 1999 to November 2, 1999 was
approximately $28.0 million.
Effective November 3, 1999, the Company is taxed as a corporation for
Federal and State income tax purposes and the effect of deferred taxes
recognized as a result of the change in tax status of the Company have been
included in operations. Deferred tax assets and liabilities are determined
based on the temporary differences between the financial statement and tax
bases of assets and liabilities as measured by the enacted tax rates.
There was no current income tax expense in 1999. The significant components
of deferred income tax expense (benefit) for the year ended December 31, 1999
was as follows:
December 31,
1999
------------
Deferred tax expense recognized as a result of change in tax
status...................................................... $ 1,739,000
Deferred tax benefit......................................... (491,000)
Net operating loss carryforward.............................. (1,695,000)
Valuation allowance.......................................... 447,000
-----------
$ --
===========
The Company's effective income tax rate differed from the Federal statutory
rate as follows:
December 31,
1999
------------
Federal statutory tax rate...................................... (35)%
Effect of LLC losses............................................ 33
Effect of change in tax status.................................. 2
Other, net ..................................................... (1)
Change in valuation allowances.................................. 1
---
-- %
===
The deferred tax assets and liabilities as of December 31, 1999 consist of
the following tax effects relating to temporary differences and carryforwards:
December 31,
1999
------------
Deferred tax assets (liabilities):
Inventory valuation............................................ $ 30,000
Non-employee stock option...................................... 334,000
Other reserves and accruals.................................... 314,000
Net operating loss............................................. 1,695,000
Property, plant and equipment.................................. (1,926,000)
-----------
447,000
Valuation allowance............................................ (447,000)
-----------
$ --
===========
F-9
PLUG POWER INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The valuation allowance at the year end December 31, 1999 is approximately
$447,000. During the year ended December 31, 1999, the valuation allowance
increased by approximately $447,000.
At December 31, 1999, the Company has unused Federal and State net
operating loss carryforwards of approximately $4.2 million. The federal net
operating loss carryforwards if unused will begin to expire during the year
ended December 31, 2019.
7. Loss Per Share
Loss per share for the Company is as follows:
For the period
June 27, 1997
Year Ended Year Ended to
December 31, December December 31,
1999 31, 1998 1997
------------ ----------- --------------
Numerator:
Net loss....................... $(33,469,312) $(9,615,963) $(5,903,340)
Denominator:
Weighted average number of
common shares outstanding..... 26,282,782 13,616,986 9,500,000
No options or warrants outstanding were included in the calculation of
diluted loss per share because their impact would have been anti-dilutive. The
calculation also excludes 111,851 contingently returnable shares in 1999.
8. Stockholders' Equity
The Company has one class of common stock, par value $.01. Each share of
the Company's common stock is entitled to one vote on all matters submitted to
stockholders. At the inception of the Company, in exchange for EDC's initial
cash contribution of $4,750,000, the Company issued 4,750,000 shares. MTI made
noncash contributions of $4,750,000 consisting of in-process research and
development ($4,042,640), and certain net assets, in exchange for 4,750,000
shares. The amount allocated to the in-process research and development
contributed to the Company by MTI represents its estimated fair value based on
the negotiations of two parties and is consistent with its value under the
cost valuation approach. Under the cost valuation approach, value is measured
by quantifying the cost of replacing the future service capability of the
acquired property without considering the amount of economic benefits that can
be achieved, or the time period over which they might continue.
Contributed in-process research and development was early development stage
property, which did not and currently does not have commercial viability or
any alternative future use and which will require substantial additional
expenditures to commercialize. Accordingly, the assigned value was charged to
operations at the time the Company was formed.
During the year ended December 31, 1998, EDC and MTI made additional total
contributions of $13,250,000 in exchange for 7,650,000 shares. EDC contributed
$7,750,000 in cash for 4,950,000 shares. MTI contributed $3,000,000 in cash,
$2,000,000 of deferred rent related to a below market lease for office and
manufacturing facilities, and $500,000 of in-kind services ($5,500,000 in
total) for 2,700,000 shares. In 1998, MTI purchased options for $191,250,
which entitled MTI to acquire 2,250,000 shares by June, 1999 for $2,250,000.
F-10
PLUG POWER INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
According to the joint venture agreement, MTI could earn non-cash credits
which will be applied toward the purchase price of shares under option. MTI
could earn these credits based on the Company obtaining certain defined levels
of research contracts. In March 1999, all parties to the agreement mutually
agreed that MTI had earned $2,250,000 of non-cash credit which were used to
acquire 2,250,000 shares.
Accordingly, these shares were issued in March 1999, a charge to operations
of $2,250,000 was recorded under the caption "General and Administrative
Expense," and $191,250 was returned to MTI in accordance with the terms of the
option agreement.
In January 1999, the Company entered into an agreement with MTI and EDC
pursuant to which, the Company had the right to require MTI and EDC to
contribute $7.5 million each in 1999 and $15.0 million each in 2000 in
exchange and for which each would receive common stock valued at $7.50 per
share. The agreement also permitted MTI and EDC to contribute any funds not
previously called by the Company on the termination date of the agreement (the
earlier of December 31, 2000 or upon an initial public offering of the
Company's shares at a price greater than $7.50 per share) in exchange for
shares at a price of $7.50 per share.
During January and February of 1999 MTI and EDC each purchased 300,000
shares of common stock for $1.5 million each.
In September 1999, the Company made a capital call of $4.0 million, and MTI
and EDC each contributed $2.0 million in cash in exchange for 266,667 shares
of common stock. In November 1999, MTI and EDC contributed the remaining $41.0
million in exchange for an aggregate of 5,466,666 shares of common stock.
On June 23, 1999, EDC purchased 704,315 shares of the Company's common
stock for $4,697,782. Also, the Company entered into a purchase agreement with
MTI to acquire approximately 36 acres of land, two commercial buildings and a
residential building located in Latham, New York in exchange for
704,315 shares of common stock.
In February 1999, two investors purchased 1,500,000 shares of common stock
for $10.0 million. In addition, one of the investors received a warrant to
purchase 400,000 shares at a price of $8.50 per share. These warrants were
exercised at the time of the initial public offering.
In April 1999 an investor purchased 299,850 shares of common stock for $2.0
million.
In April 1999, an investor purchased 1,000,000 shares of common stock for
$6.7 million. In connection with the purchase agreement, the investor is
required to spend an aggregate of $840,000 for market research and related
services on behalf of the Company. In the event such amounts are not expended
by April, 2002, up to 111,851 of the previously issued shares may be returned
to the Company. The Company will account for these services by recording a
charge to earnings and a credit to paid-in capital as these services are
rendered. As of December 31, 1999, no services had been provided.
Additionally, the investor received warrants to purchase an additional 350,000
shares of common stock at an exercise price of $8.50 per share. These warrants
were exercised at the time of the initial public offering.
F-11
PLUG POWER INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. Employee Benefit Plans
Stock Option Plans (the Plans):
Effective July 1, 1997, the Company established a stock option plan to
provide employees, consultants, and members of the Board of Directors the
ability to acquire an ownership interest in the Company. Options for employees
generally vest 20% per year and expire ten years after issuance. Options
granted to members of the Board vest 50% upon grant and 25% per year
thereafter. Options granted to consultants vest one-third on the expiration of
the consultant's initial contract term, with an additional one-third vesting
on each anniversary thereafter. At December 31, 1999, there were a total of
3,395,215 options granted and outstanding under this plan. Although no further
options will be granted under this plan, the options previously granted will
continue to vest in accordance with this plan and vested options will be
exercisable for shares of common stock.
In August 1999, our Board of Directors and stockholders adopted the 1999
Stock Option and Incentive Plan. At December 31, 1999 there were 285,500
options granted and outstanding, and an additional 3,409,251 options available
to be issued under the plan. Additionally, the number of shares of common
stock available for issuance under the plan will increase by the amount of any
forfeitures under the 1999 Stock Option and Incentive Plan and under the 1997
Stock Option Plan. The number of shares of common stock under the plan will
further increase January 1 and July 1 of each year by an amount equal to 16.4%
of any net increase in the total number of shares of stock outstanding. The
1999 Stock Option and Incentive Plan permits the Company to: grant incentive
stock options; grant non-qualified stock options; grant stock appreciation
rights; issue or sell common stock with vesting or other restrictions, or
without restrictions; grant rights to receive common stock in the future with
or without vesting; grant common stock upon the attainment of specified
performance goals; and grant dividend rights in respect of common stock.
To date, options granted under this plan generally vest 20% per year and
expire ten years after issuance. These grants may be made to officers,
employees, non-employee directors, consultants, advisors and other key persons
of the Company.
The following table summarizes information about the stock options
outstanding under the Plans at December 31, 1999:
Outstanding
----------------------------
Weighted
Average Average
Remaining Exercise
Exercise price Shares Life Price
-------------- --------- --------- --------
$1.00........................................... 1,413,400 8.1 $ 1.00
$5.00........................................... 575,275 9.0 $ 5.00
$6.67........................................... 584,040 9.2 $ 6.67
$11.00.......................................... 775,200 9.6 $11.00
$15.00.......................................... 332,800 9.8 $15.00
--------- --- ------
3,680,715 9.0 $ 5.90
F-12
PLUG POWER INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
The following table summarizes activity under the Plan:
Weighted
Number of Average
Shares Exercise
Subject Price
to Option per Share
--------- ---------
Option Activity
Balance, June 27, 1997.................................. -- $ --
Granted at fair value................................... 1,132,500 1.00
Forfeited or terminated................................. (18,500) 1.00
---------
Balance December 31, 1997............................... 1,114,000 1.00
Granted at fair value................................... 460,650 3.09
Granted below fair value................................ 197,000 1.00
Forfeited or terminated................................. (96,450) 1.03
---------
Balance December 31, 1998............................... 1,675,200 1.57
Granted at fair value................................... 2,047,039 9.39
Forfeited or terminated................................. (17,396) 7.24
Exercised............................................... (24,128) 1.74
---------
Balance December 31, 1999............................... 3,680,715 $5.90
=========
At December 31, 1999, 3,409,251 shares of common stock were reserved for
issuance under future stock option exercises.
Accounting for Stock Based Compensation:
The per share weighted average fair value of the options granted during
1999, 1998 and 1997 was $7.19, $0.58 and $0.26, respectively, using the
minimum value method of valuing stock options, for the options granted prior
to the Company's initial public offering and the Black-Scholes pricing model
subsequent to the offering.
The dividend yield was assumed to be zero for all periods. The risk free
interest rate ranged from 5.1% to 6.3% in 1999, 4.5% to 5.6% in 1998 and 5.8%
to 6.1% in 1997. An expected life of 5 years was assumed for each year.
Expected volatility of 114% was used in determining fair value under the
Black-Scholes pricing model and was excluded using the minimum value method.
The Company applies Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees" in accounting for its stock options plans and
does not record compensation cost for options granted at fair value. Had the
Company determined compensation cost based on fair value in accordance with
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-
Based Compensation," net loss would have increased to the pro forma amounts
indicated below:
June 27,
Year ended Year ended 1997 to
December 31, December December 31,
1999 31, 1998 1997
------------ ----------- ------------
Net loss, as reported.............. $(33,469,312) $(9,615,963) $(5,903,340)
Proforma net loss.................. (34,716,991) (9,775,441) (6,000,628)
Proforma loss per share, basic and
diluted........................... $ (1.32) $ (0.72) $ (0.71)
F-13
PLUG POWER INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
During 1998 the Company awarded 197,000 options to key employees for which
issuance was contingent upon the attainment of specified performance
objectives. Of those awarded, 51,500 were forfeited. The difference between
the fair value of the options at the measurement date and the exercise price
of the options was $582,000, and will be charged to expense over the four year
vesting period of the options. The charge to operations was $126,800 and
$212,000 for the years ended December 31, 1999 and 1998 respectively.
Additionally in 1999 the Company modified the terms of certain stock
options. The impact of this modification resulted in a charge to earnings of
$800,000 in 1999.
1999 Employee Stock Purchase Plan:
In 1999, the Company adopted the 1999 Employee Stock Purchase Plan (the
Plan) under which employees will be eligible to purchase shares of the
Company's common stock at a discount through periodic payroll deductions. The
Plan is intended to meet the requirements of Section 423 of the Internal
Revenue Code. After the initial period, purchases will occur at the end of six
month offering periods at a purchase price equal to 85% of the market value of
the Company's common stock at either the beginning of the offering period or
the end of the offering period, whichever is lower. The first offering period
under the plan will begin on January 1, 2000 and will end on April 30, 2000.
Participants may elect to have from 1% to 10% of their pay withheld for
purchase of common stock at the end of the offering period, up to a maximum of
$12,500 within any offering period. The Company has reserved 1,000,000 shares
of common stock for issuance under the Plan. At December 31, 1999, the Company
had not issued any shares under the Plan.
401(k) Savings & Retirement Plan:
The Company offers a 401(k) Savings & Retirement Plan to eligible employees
meeting certain age and service requirements. This plan permits participants
to contribute up to 15% of their salary, up to the maximum allowable by the
Internal Revenue Service regulations. Participants are immediately vested in
their voluntary contributions plus actual earnings thereon. Participants are
vested in the Company's matching contribution based on the years of service
completed. Participants are fully vested upon completion of four years of
service. The Company's expense for this plan was $224,000 and $95,000 for
years ended December 31, 1999 and 1998, respectively, and $23,000 for the
period from June 27, 1997 (date of inception) to December 31, 1997.
10. Related Party Transactions
On June 27, 1997, the Company entered into a distribution agreement with
the EDC. Under the agreement, EDC was appointed the Company's exclusive
independent distributor in Michigan, Ohio, Indiana and Illinois to promote and
assist in the sale of products developed by the Company, subject to certain
terms and conditions.
On June 27, 1997, the Company entered into a management services agreement
with MTI to obtain certain services and lease certain facilities for a period
of one year. At the expiration of this agreement, the Company extended the
existing facilities lease through September 30, 1998. In June 1998, the
Company entered into a new facilities lease which commenced on October 1,
1998, and had a term of ten years with an option for an additional five years.
Rental expense was $231,000 and $378,000 for the years ended December 31, 1999
and 1998, respectively. Rental expense was $79,000 for the period from June
27, 1997 (date of inception) to December 31, 1997. The total amount due MTI
was $0 and $286,492 at December 31, 1999 and 1998, respectively. As part of
the new facilities lease, MTI agreed to reimburse the Company up to $2.0
million for improvements made to the Company's facilities. At December 31,
1998, $685,306 in Company expenditures had not been reimbursed by MTI, and is
included in due from investor. This lease and the management agreement with
MTI have been terminated.
F-14
PLUG POWER INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In 1999, the Company entered into a purchase agreement with MTI to acquire
approximately 36 acres of land, two commercial buildings and a residential
building located in Latham, New York in exchange for 704,315 shares of common
stock. In connection with the transaction with MTI, the Company has written
off deferred rent expense in the amount of $1,850,000 relating to a 10-year
facilities lease associated with the property. Simultaneous with the closing,
the Company agreed to lease back to MTI certain office and manufacturing space
on a short-term basis through November, 1999.
11. Investment in affiliate
In February 1999, the Company entered into an agreement with GE MicroGen,
Inc. (formerly GE On-Site Power, Inc.), a wholly owned subsidiary of General
Electric Co., to create GE Fuel Cell Systems, L.L.C. (GEFCS) a limited
liability company created to market and distribute fuel cell systems world-
wide. GE MicroGen, Inc. owns 75% of GEFCS and the Company owns 25% of GEFCS.
In connection with the formation of GEFCS, the Company issued 2,250,000 shares
of common stock to GE MicroGen valued at $11,250,000. The Company accounts for
its interest in GEFCS on the equity method of accounting and adjusts its
investment by its proportionate share of income or losses under the caption
"Equity in losses of affiliate". From inception through December 31, 1999,
GEFCS had no revenue and an operating and net loss of approximately
$1,762,000. At December 31, 1999 the difference between the amount at which
the investment is carried and the amount of the underlying equity in net
assets of GEFCS is $9,778,250. Such amount is being amortized on a straight
line basis over a ten year period. For the year ended December 31, 1999,
equity in losses of affiliate was $1,471,750 including goodwill amortization
of $1,031,250.
The Company also issued warrants to GE MicroGen to purchase 3 million
shares at $12.50 per share. These warrants were exercised for a total purchase
price of $37.5 million.
As part of the agreement, the Company will work closely with General
Electric's Corporate Research and Development Center for product development
and manufacturing support. GEFCS will market, sell, install and service fuel
cells systems, designed and manufactured by the Company, world-wide (with the
exception of EDC's exclusive four state territory of Michigan, Ohio, Indiana
and Illinois) for residential and small business power applications up to
35kW. In addition, the Company entered into a ten year distribution agreement
with GEFCS that requires GEFCS purchase from the Company a specified number of
pre- commercial units by December 31, 2000.
In accordance with the terms of the agreement, General Electric will
provide capital, in the form of loans, to fund the purchase of pre-commercial
units during the period ending December 31, 2000. General Electric will also
provide additional capital, in the form of a loan not to exceed $8.0 million,
to fund the operations of GEFCS. The Company has agreed to purchase at least
$11.5 million of additional technical support services over a three year
period.
12. Commitments and contingencies
Litigation:
The Company has disclosed on a Form 8-K filed January 25, 2000 with the
Securities and Exchange Commission that a legal complaint was filed against
the Company, The Detroit Edison Company and EDC alleging the entities
misappropriated business and technical trade secrets, ideas, know-how and
strategies relating to fuel cell systems and breached certain contractual
obligations owed to DCT, Inc. The Company believes the allegations made
against it are without merit and intends to vigorously contest the litigation,
but the ultimate outcome is of course uncertain.Due to the early stage of this
litigation, we cannot determine whether any loss will result from the ultimate
outcome.
F-15
PLUG POWER INC.
(A Development Stage Enterprise)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Concentrations of credit risk:
The Company has cash deposits in excess of federally insured limits. The
amount of such deposits is approximately $5.7 million at December 31, 1999.
Capital leases:
The Company leased certain equipment under capital lease transactions
during the year with an original cost of $291,443, which had a net book value
at December 31, 1999 of $195,205 and which is included in machinery and
equipment.
Future minimum non-cancelable lease payments are as follows:
2000.............................................................. $ 93,022
2001.............................................................. 93,022
2002.............................................................. 34,068
2003.............................................................. 5,368
---------
225,480
Less amounts representing interest................................ (30,275)
---------
$ 195,205
=========
13. Subsequent events (unaudited)
Purchase of assets:
On February 18, 2000, the Company signed a definitive agreement with
Gastec, a leading developer of fuel processor technology, located in the
Netherlands, to acquire certain intellectual property and assets related to
fuel processor development for systems ranging up to 100kW in size for $15
million in cash.
Equity investments:
On March 15, 2000, the Company acquired 28% of the aggregate shares of
common stock of Advanced Energy Systems, Inc., a supplier of power electronic
inverters for fuel cell systems for approximately $1.5 million in cash and
7,000 shares of the Company's common stock. In connection with the
transaction, the Company received an exclusive, worldwide, royalty-free
license to use all of Advanced Energy's intellectual property for power
electronic inverters for any fuel cell application.
Development agreements:
On March 15, 2000, the Company finalized a joint development agreement with
GE MicroGen and Joh. Vaillant GmbH u. Co. to develop a combined furnace, hot
water heater, and fuel cell system that will provide both heat and electricity
for the home.
F-16